mcsangel2
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Post by mcsangel2 on Jun 17, 2024 16:20:30 GMT -5
Hi y'all, I haven't posted in a REALLY long time. I've been here I think for 25 years....wow.
PDQ, will redact these numbers later.
DH and I (53/52) just passed the 1M mark in our combined 401k balances. Yay! HHI is about $120k, and he'll have a pension too (shockingly). We've both been at our companies for 23 years this year. No kids. No debt except house, due to be paid off in 2033.
I didn't even have a 401k balance when I started this job, lurking here is where I learned everything I need to know, and I buckled down when I was 31 and took our plans in hand and gradually increased our contributions over time.
DH is well aware that I am absolutely not working past 62, and maybe will retire earlier than that if possible (which seems fairly likely). He said he doesn't even want to think about retiring until at least 65 (doesn't know what he'd do with himself. I don't have that problem).
The only thing is, we put all our contributions into our 401ks. We don't have IRAs or Roths. or Roth 401ks. This is it. I wanted to do it this way because I felt the balances would grow most effectively this way. And at minimum I'm planning to work for at least another 7 years so it has more growing to do still. Actually, more than that since I'd be likely to take SS and let the 401k grow for awhile. So it could possibly be at 2M before we're both drawing on it. Leaning towards pinning DH's pension to me once I retire so we can start drawing it.
So exactly how bad is the tax hit going to be? What advice do you have for me on how to handle retirement contributions for the next 10 years?
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Post by The Walk of the Penguin Mich on Jun 17, 2024 16:46:08 GMT -5
The biggest problem you are going to have is medical insurance from 62-65. If he is going to continue to work, that’s covered.
Optimally, you want your pots of money to be taxed and untaxed. This is where a Roth IRA and investment accounts come into play. This gives you the flexibility to deal with a tax bite better, if you need to make a big draw without getting into IRMAA territory or push you into another tax bracket.
What is your and his anticipated SS at different ages and when added to his pension? If you start drawing on his pension early, where does this put him? Take this number and see where it puts you. What is your household budget? What percentage of income does he make?
I don’t think that there is really a ‘one size fits all’ answer to your question, because how you manipulate where you draw from can impact you4 household income.
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jerseygirl
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Post by jerseygirl on Jun 17, 2024 16:51:32 GMT -5
How bad is the tIRA tax to be? When you are obliged to take RMDs you will be taking out approximately 4-5%/yr. Estimate how much your tIRA will be then and the RMD. It will be taxed as ordinary income. Will income taxes be higher then? Maybe. Income taxes are fairly low now but government debt will just be increasing so probably taxes will also If you put into a Roth, you’ll pay income taxes now but never any more taxes on that money
We are being hit not only by income taxes on the tIRAs but Medicare increases through IRMAA which are considerable.
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mcsangel2
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Post by mcsangel2 on Jun 17, 2024 19:18:05 GMT -5
The biggest problem you are going to have is medical insurance from 62-65. If he is going to continue to work, that’s covered. Optimally, you want your pots of money to be taxed and untaxed. This is where a Roth IRA and investment accounts come into play. This gives you the flexibility to deal with a tax bite better, if you need to make a big draw without getting into IRMAA territory or push you into another tax bracket. What is your and his anticipated SS at different ages and when added to his pension? If you start drawing on his pension early, where does this put him? Take this number and see where it puts you. What is your household budget? What percentage of income does he make? I don’t think that there is really a ‘one size fits all’ answer to your question, because how you manipulate where you draw from can impact you4 household income. Haven't looked up our SS for ages, I'm in the process of setting up our ssa.gov accts so we can see them (weird complicated process now that they don't mail them out anymore). All of our 401k planning has been done as though SS and pension don't exist. He has lots of anxiety about money and the idea of being on a fixed income. (he works for a large national company, but we all know how things can go wrong with pensions). We just began the discussion of who to pin the pension to - he thinks he wants to work indefinitely, which means less time drawing it if we attach it to him. I want to retire early, but I also have health complications that it's currently impossible to predict what it will mean for me 10 years from now, and whether it means a reduced life expectancy. I believe he is actually already eligible to draw the pension if he wanted (20 years is the cutoff). His company also offers more benefits after 25 years (1.5 years away for him), retirees are eligible to stay on the company insurance plan (at a higher cost though). Our income split is 35-40 me/60-65 him. Um, what is IRMAA?
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tallguy
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Post by tallguy on Jun 17, 2024 21:09:40 GMT -5
The biggest problem you are going to have is medical insurance from 62-65. If he is going to continue to work, that’s covered. Optimally, you want your pots of money to be taxed and untaxed. This is where a Roth IRA and investment accounts come into play. This gives you the flexibility to deal with a tax bite better, if you need to make a big draw without getting into IRMAA territory or push you into another tax bracket. What is your and his anticipated SS at different ages and when added to his pension? If you start drawing on his pension early, where does this put him? Take this number and see where it puts you. What is your household budget? What percentage of income does he make? I don’t think that there is really a ‘one size fits all’ answer to your question, because how you manipulate where you draw from can impact you4 household income. Haven't looked up our SS for ages, I'm in the process of setting up our ssa.gov accts so we can see them (weird complicated process now that they don't mail them out anymore). All of our 401k planning has been done as though SS and pension don't exist. He has lots of anxiety about money and the idea of being on a fixed income. (he works for a large national company, but we all know how things can go wrong with pensions). We just began the discussion of who to pin the pension to - he thinks he wants to work indefinitely, which means less time drawing it if we attach it to him. I want to retire early, but I also have health complications that it's currently impossible to predict what it will mean for me 10 years from now, and whether it means a reduced life expectancy. I believe he is actually already eligible to draw the pension if he wanted (20 years is the cutoff). His company also offers more benefits after 25 years (1.5 years away for him), retirees are eligible to stay on the company insurance plan (at a higher cost though). Our income split is 35-40 me/60-65 him. Um, what is IRMAA?Income-Related Monthly Adjustment Amount IRMAA is a table of Medicare surcharge amounts for recipients who make "too much" money. The Social Security Administration looks back at your income from two years before and determines if you are subject to IRMAA. There are (I think) five levels of surcharge depending on that income, going up to 3.4 times the regular Medicare Part B premium. Part D premiums are also subject to IRMAA surcharges.
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Tiny
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Post by Tiny on Jun 19, 2024 12:51:21 GMT -5
So exactly how bad is the tax hit going to be? What advice do you have for me on how to handle retirement contributions for the next 10 years? I can't say how bad the tax hit will be. I can say it's a really good thing that you are thinking and looking ahead. You will have fewer surprises. Here are some things you need to do: Review your and your spouse's Social Security go to ssa.gov. You can use their "calculator" to estimate the amount of SS to expect. Be aware that the calculate assumes you are working at your current job and that your income will go up every year UNTIL YOUR FULL RETIREMENT AGE. So you need to adjust the future "numbers". When I thought I might be out of work at 59yo and would "retire" early - I entered $0 in income for the remaining years til my FRA. Review your spouse's pension and the possible payouts from it. In theory, your 401K nest egg will be used to fill in the income you need after you receive your SS and pension income. You may also want look at survivor benefits (if one spouse dies how does that effect the remaining spouse's income and tax burden)? Going from MFJ to Single might be a bigger tax burden than the years you file MFJ while withdrawing from your 401K - I mention that just so it's not a surprise. You can also look at how the State you will reside in during your retirement year taxes retirement income. This isn't that same as a State with "no income tax". If you are in a State that has an income tax - that might not apply to your retirement income. State's do different things for pensions and SS. At some point you will most likely want to think about some long term strategies - and perhaps do conversions from your 401K to a Roth for some amount of years once you are no longer working. My oldest sibling has a heck lot of income (pension, SS) and didn't need to tap his 401K. What he did was convert some 401K money to a Roth every year (basically up to the top of whatever tax bracket his pension/SS put him in or maybe to the top of the next tax bracket) - as a way to draw down some of the 401K money (in the years before he was required to take an RMD). For him the Roth was a way to transfer money to his heirs in a way that wouldn't be so tax burdensome to them (he's OLD and doesn't have another 10 or 15 years of life to go) and his kids are mid career with young families - and getting to the highest incomes they will have.) The kids will potentially be getting a mix of Roth and IRA money. I know you said you don't have kids - but you still might want to think about what happens to any money you have left at the end.
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haapai
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Post by haapai on Jun 19, 2024 13:13:48 GMT -5
So exactly how bad is the tax hit going to be? What advice do you have for me on how to handle retirement contributions for the next 10 years? I can't say how bad the tax hit will be. I can say it's a really good thing that you are thinking and looking ahead. You will have fewer surprises. Here are some things you need to do: Review your and your spouse's Social Security go to ssa.gov. You can use their "calculator" to estimate the amount of SS to expect. Be aware that the calculate assumes you are working at your current job and that your income will go up every year UNTIL YOUR FULL RETIREMENT AGE. So you need to adjust the future "numbers". When I thought I might be out of work at 59yo and would "retire" early - I entered $0 in income for the remaining years til my FRA. Review your spouse's pension and the possible payouts from it. In theory, your 401K nest egg will be used to fill in the income you need after you receive your SS and pension income. You may also want look at survivor benefits (if one spouse dies how does that effect the remaining spouse's income and tax burden)? Going from MFJ to Single might be a bigger tax burden than the years you file MFJ while withdrawing from your 401K - I mention that just so it's not a surprise. You can also look at how the State you will reside in during your retirement year taxes retirement income. This isn't that same as a State with "no income tax". If you are in a State that has an income tax - that might not apply to your retirement income. State's do different things for pensions and SS. At some point you will most likely want to think about some long term strategies - and perhaps do conversions from your 401K to a Roth for some amount of years once you are no longer working. My oldest sibling has a heck lot of income (pension, SS) and didn't need to tap his 401K. What he did was convert some 401K money to a Roth every year (basically up to the top of whatever tax bracket his pension/SS put him in or maybe to the top of the next tax bracket) - as a way to draw down some of the 401K money (in the years before he was required to take an RMD). For him the Roth was a way to transfer money to his heirs in a way that wouldn't be so tax burdensome to them (he's OLD and doesn't have another 10 or 15 years of life to go) and his kids are mid career with young families - and getting to the highest incomes they will have.) The kids will potentially be getting a mix of Roth and IRA money. I know you said you don't have kids - but you still might want to think about what happens to any money you have left at the end. The post that I have quoted is well meant and generally gives good advice but the part that I have bolded is not quite right.
Social Security estimates of future benefits assume that you will continue working and earning the same amount that you made in the most recent year that they have data for. They do not assume anything about your income going up.
If you are planning on retiring before claiming benefits or planning to earn less, inputting zeros or the lower salary that you expect to earn is excellent advice. On the other hand, there is a bit of truth in the bolded bit. If you are looking at your estimated social security benefit as an inflation-adjusted amount, you may have to have income increases that match inflation in order to eventually earn a benefit that is worth as much when you get it as it is now. It depends on whether your best 35 years of income, adjusted for inflation, are in the bag already or not. ETA: If you're routinely earning more than is assessed social security taxes, what I just said may be a little bit wrong too.
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haapai
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Post by haapai on Jun 19, 2024 15:09:12 GMT -5
Oh, I see some income numbers now. I'm a bit ashamed of not absorbing them earlier. What I said about exceeding the social security max can probably be ignored.
I apologize for my lousy reading comprehension.
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teen persuasion
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Post by teen persuasion on Jun 21, 2024 13:49:54 GMT -5
The biggest problem you are going to have is medical insurance from 62-65. If he is going to continue to work, that’s covered. Optimally, you want your pots of money to be taxed and untaxed. This is where a Roth IRA and investment accounts come into play. This gives you the flexibility to deal with a tax bite better, if you need to make a big draw without getting into IRMAA territory or push you into another tax bracket. What is your and his anticipated SS at different ages and when added to his pension? If you start drawing on his pension early, where does this put him? Take this number and see where it puts you. What is your household budget? What percentage of income does he make? I don’t think that there is really a ‘one size fits all’ answer to your question, because how you manipulate where you draw from can impact you4 household income. Haven't looked up our SS for ages, I'm in the process of setting up our ssa.gov accts so we can see them (weird complicated process now that they don't mail them out anymore). All of our 401k planning has been done as though SS and pension don't exist. He has lots of anxiety about money and the idea of being on a fixed income. (he works for a large national company, but we all know how things can go wrong with pensions). We just began the discussion of who to pin the pension to - he thinks he wants to work indefinitely, which means less time drawing it if we attach it to him. I want to retire early, but I also have health complications that it's currently impossible to predict what it will mean for me 10 years from now, and whether it means a reduced life expectancy. I believe he is actually already eligible to draw the pension if he wanted (20 years is the cutoff). His company also offers more benefits after 25 years (1.5 years away for him), retirees are eligible to stay on the company insurance plan (at a higher cost though). Our income split is 35-40 me/60-65 him. Um, what is IRMAA? Once you have your SS PIA numbers for each of you, put your numbers in OpenSocialSecurity.com . This site will run thru all possibilities to suggest your best claiming strategy. Usually, it's the higher earner waits to age 70 to claim SS, and the lower earner claims some time earlier, maybe at 62. It doesn't figure in tax hits from pensions, RMDs, or Roth conversions, but it's a start. We are planning to put off SS for both of us to 70, to give us more room for Roth conversions. We can do more, smaller, conversions for a longer time at a lower tax hit each year that way. We also popped above 1m in retirement totals this year, but we are about 40% Roth 60% traditional now. We have stock funds only in our Roth IRAs and my SIMPLE IRA (small), but a mix of bond funds/MM funds and stock funds in DH's tIRA (to limit its growth). The idea is to encourage growth in the tax free accounts, and limit it in the account incurring OI tax rates later. My SIMPLE IRA treatment is because of a weird quirk in state tax law - after 59.5, the state exempts from taxation the first $20k tIRA withdrawal/conversion per year per person. My account is small; if it gets emptied early, we only get DH's $20k exemption -- I can't transfer mine to him. So I want to pump my balance up enough to sustain an annual $20k conversion. We are doing small Roth conversions of DH's tIRA, and contributing to my SIMPLE IRA now; it's mostly a wash numbers wise, but it's a tiny shift in proportion from his side to mine to even things up.
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MN-Investor
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Post by MN-Investor on Jun 21, 2024 21:27:23 GMT -5
Just to be contrary, if I were starting out now, I would put everything into Roth IRAs/401(k)s and taxable accounts.
The big advantage of taxable IRAs is the immediate exclusion from income of the yearly contribution. I dunno. My husband and I always socked away the maximum allowed. Decent incomes, no children, easy to do.
I own specific stocks and a few funds in my taxable accounts. The nice thing about owning shares in a U.S. corporation in a taxable account is that the dividends are qualified dividends and are treated like long term capital gains. As long as I don't sell those shares, the qualified dividends are the only taxable thing about owning those shares in a taxable account.
Yeah, your investments grow tax free in a traditional retirement account, but they also come out as ordinary income. Honest to God, that sucks. When I sell my 3M stock and my Apple stock from my taxable account, it gets long term capital gains treatment. My Apple stock, which I paid $15k for, is worth about $192k now.
It sounds like a great idea to convert traditional IRAs to Roth IRAs and the years between when you retire and when you start collecting Social Security should be a great time for doing that. After all, low income, right? Of course, that's when it's nice to have money in a taxable account to live off of. And you can use that money in your taxable account to pay the taxes when you do the Roth conversion. But... what happens if your spouse passes away? That happened to me. All of a sudden it made sense to take Social Security and I no longer had low income tax years.
Worst of all is what my husband used to call our First World Problem. I turn 73 in 2025. I'm going to have to take my first RMD. Right now that's going to exceed $100k. Yeah, First World Problem. Hard to complain about. But, again, if I had it to do over again, I would prefer the total flexibility of a taxable account and Roth accounts.
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Rukh O'Rorke
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Post by Rukh O'Rorke on Jun 21, 2024 21:52:49 GMT -5
Just to be contrary, if I were starting out now, I would put everything into Roth IRAs/401(k)s and taxable accounts. The big advantage of taxable IRAs is the immediate exclusion from income of the yearly contribution. I dunno. My husband and I always socked away the maximum allowed. Decent incomes, no children, easy to do. I own specific stocks and a few funds in my taxable accounts. The nice thing about owning shares in a U.S. corporation in a taxable account is that the dividends are qualified dividends and are treated like long term capital gains. As long as I don't sell those shares, the qualified dividends are the only taxable thing about owning those shares in a taxable account. Yeah, your investments grow tax free in a traditional retirement account, but they also come out as ordinary income. Honest to God, that sucks. When I sell my 3M stock and my Apple stock from my taxable account, it gets long term capital gains treatment. My Apple stock, which I paid $15k for, is worth about $192k now. It sounds like a great idea to convert traditional IRAs to Roth IRAs and the years between when you retire and when you start collecting Social Security should be a great time for doing that. After all, low income, right? Of course, that's when it's nice to have money in a taxable account to live off of. And you can use that money in your taxable account to pay the taxes when you do the Roth conversion. But... what happens if your spouse passes away? That happened to me. All of a sudden it made sense to take Social Security and I no longer had low income tax years. Worst of all is what my husband used to call our First World Problem. I turn 73 in 2025. I'm going to have to take my first RMD. Right now that's going to exceed $100k. Yeah, First World Problem. Hard to complain about. But, again, if I had it to do over again, I would prefer the total flexibility of a taxable account and Roth accounts. You would just have a lot less saved, maybe even 1/3 or higher propotion less saved. it all comes out in the wash. Meanwhile - the taxable account is unprotected from judgements or bankrupcies duing your decades of saving. That was a great comfort to me.
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MN-Investor
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Post by MN-Investor on Jun 22, 2024 1:04:39 GMT -5
You would just have a lot less saved, maybe even 1/3 or higher propotion less saved. it all comes out in the wash. Meanwhile - the taxable account is unprotected from judgements or bankrupcies duing your decades of saving. That was a great comfort to me. Our savings would have been reduced by the marginal rate of taxes we paid each year on those contributions. A combined federal and state 33% marginal tax rate? Or higher? Yeah... no. I don't think it was that high. But yeah, there would have been less to invest. Offsetting that, though, was the fact that you were not limited in your investment choices when your money was in a taxable account. I remember our first companies' 401(k) plans. They had high expense ratio funds, other poor choices. Companies got wiser over time and offered better investment choices, but some of the first ones really sucked. Some companies still have poor choices available. One of the things that I did do in 2012 was a net unrealized appreciation transaction. I had company stock in a 401(k) which, by 2012 - the year I turned 59½ - was highly appreciated. It was worth 10 times what I paid for it. Heck of a deal. So I rolled the rest of my 401(k) into an IRA while transferring the company stock portion to a taxable account. I basically "un-did" the 401(k) contribution represented by those shares by paying taxes in 2012 on what had been excluded from my income in those older contribution years. While I've sold some of those shares since 2012, I still own a large number and, as of today, they are worth 47 times what I paid for them. I'm saving a HECK of a lot of taxes by having sales of those shares taxed at long term capital gains rates. I guess my husband and I never considered protecting our investments from judgements or bankruptcies. We always had umbrella insurance and medical insurance and good jobs. At any rate, I've lived this long without judgements or bankruptcies, so I guess we did ok.
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jerseygirl
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Post by jerseygirl on Jun 22, 2024 7:10:16 GMT -5
Big problem with significant tIRA IS RMDs causing an increase in IRMAA for Medicare. The IRMAA is based on income without the deductions. IRMAA can be $175 to $350/ month per person. Also increased prescriptions insurance. Plus the tIRA is taxed as regular income not capital gains.
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teen persuasion
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Post by teen persuasion on Jun 22, 2024 7:28:00 GMT -5
We are in a low tax bracket, but have a high marginal rate because of tax credits, fully refundable, that would phaseout with higher AGI and w2 wages. So going fully traditional with employer plans made sense. But then the refunds from those credits and others we used to fund Roth IRAs. So we got diversity, and there wasn't any more tax advantage to be had from using a tIRA (IRAs are useless for those credits, and our tax was zero by then) thus Roth was essentially free at that point.
We've ended up at about 40% Roth, we only added Roth IRAs when we were in our mid 40s and quit adding to Roth IRAs in 2020 a few years before DH retired (hoarding cash). All those Roth contributions are "extra", refund money that that resulted from us increasing traditional 401k contributions.
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Rukh O'Rorke
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Post by Rukh O'Rorke on Jun 22, 2024 11:42:33 GMT -5
You would just have a lot less saved, maybe even 1/3 or higher propotion less saved. it all comes out in the wash. Meanwhile - the taxable account is unprotected from judgements or bankrupcies duing your decades of saving. That was a great comfort to me. Our savings would have been reduced by the marginal rate of taxes we paid each year on those contributions. A combined federal and state 33% marginal tax rate? Or higher? Yeah... no. I don't think it was that high. But yeah, there would have been less to invest. Offsetting that, though, was the fact that you were not limited in your investment choices when your money was in a taxable account. I remember our first companies' 401(k) plans. They had high expense ratio funds, other poor choices. Companies got wiser over time and offered better investment choices, but some of the first ones really sucked. Some companies still have poor choices available. One of the things that I did do in 2012 was a net unrealized appreciation transaction. I had company stock in a 401(k) which, by 2012 - the year I turned 59½ - was highly appreciated. It was worth 10 times what I paid for it. Heck of a deal. So I rolled the rest of my 401(k) into an IRA while transferring the company stock portion to a taxable account. I basically "un-did" the 401(k) contribution represented by those shares by paying taxes in 2012 on what had been excluded from my income in those older contribution years. While I've sold some of those shares since 2012, I still own a large number and, as of today, they are worth 47 times what I paid for them. I'm saving a HECK of a lot of taxes by having sales of those shares taxed at long term capital gains rates. I guess my husband and I never considered protecting our investments from judgements or bankruptcies. We always had umbrella insurance and medical insurance and good jobs. At any rate, I've lived this long without judgements or bankruptcies, so I guess we did ok. true about the lousy 401k fees! I had one that was trully terrible with one job - everything was around 5% either a or b fee, forget which, plus like 1-2% per year. But even with those terrible choices, my math said that saving the taxes was better than not. I have access to a roth 401k right now, but I would have to invest a lot if I didn't get the tax break. 8800 per year to taxes (fed and state) instead of the investments, and likely more as I might get bumped up into the next fed tax band with my bonus and side biz income. When working on my side biz - I work nights and weekends till project is done. I charge a nice rate, but the taxes are high too! Thinking of losing more of that after all the time I've given up and stress I take on for it is a tough call for me! One you get to withdrawing, you get to fill up the deduction and then the lower tax tiers, and some people can avoid a tax band or two in retirement. Plus - it seems the state of Illinois does not tax 401k withdrawals! I can hardly beleive this is true! (but makes sense if the trying to get retirees not to move to no state taxes states...). So that is an instant win for me. Ill income tax is aI think 4.95%. (Is it really true?? someone pinch me!!) So based on current tax brackets: for me, money going into 401k is escaping 24% fed and 4.95% state taxes. I likely won't be able to escape the 24% fed rate in retirement, I'm afraid, do to having so many debt repayments and some other higher than I'd like expenses (many cats, and feeding ferals too. high property taxes, ~10% sales tax, etc.). But, I'll get to bypass state income tax, have over 11k free from fed tax, and then another 35k at the 12% rate. The 22% rate isnt a huge break off of 24%, but already the savings here seem very worth it to me. My forray into the 24% bracket would be very minimal, and hopefully not every year! So if you think about what rate your money would have been taxes going in - say 20% if you don't like 30%. Then you'd have 20% less money in taxable or roth accounts than you have in 401k. If your effective tax rate after filing is about 20% - then it is a wash (bypassing any fees discussion. By now you might have rolllover into a self directed IRA, if not you should! and can have the same fees/lack of fees in either scenario). So if you get a RMD of 100k, and you don't need 50k of it, pay the taxes, and then put the 40k left over into taxable and call it even. The irmaa is the other thing, but up to 350 extra a month for insurance seems like you just don't get a discount like the more marginally situated seniors. I think taxes just hurt more when you have the money in hand and have to hand it over! I think that is why they take it out of our checks as we go along.....likely riots if people got the money and then had to hand it over later....we'd all feel the tax pain much more acutely.
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Rukh O'Rorke
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Post by Rukh O'Rorke on Jun 22, 2024 11:47:04 GMT -5
We are in a low tax bracket, but have a high marginal rate because of tax credits, fully refundable, that would phaseout with higher AGI and w2 wages. So going fully traditional with employer plans made sense. But then the refunds from those credits and others we used to fund Roth IRAs. So we got diversity, and there wasn't any more tax advantage to be had from using a tIRA (IRAs are useless for those credits, and our tax was zero by then) thus Roth was essentially free at that point. We've ended up at about 40% Roth, we only added Roth IRAs when we were in our mid 40s and quit adding to Roth IRAs in 2020 a few years before DH retired (hoarding cash). All those Roth contributions are "extra", refund money that that resulted from us increasing traditional 401k contributions. You were a wizard with your planning teen! If you would look over my post after yours and let me know of any flaws in my thinking, I would greatly appreciate it! I think I am approaching my use of 401k logically with the taxes, but you never know when you might have a blind spot.
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seriousthistime
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Post by seriousthistime on Jun 22, 2024 13:02:31 GMT -5
Plus - it seems the state of Illinois does not tax 401k withdrawals! I can hardly beleive this is true! (but makes sense if the trying to get retirees not to move to no state taxes states...). So that is an instant win for me. Ill income tax is aI think 4.95%. (Is it really true?? someone pinch me!!) It's true!
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Rukh O'Rorke
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Post by Rukh O'Rorke on Jun 22, 2024 13:12:54 GMT -5
Plus - it seems the state of Illinois does not tax 401k withdrawals! I can hardly beleive this is true! (but makes sense if the trying to get retirees not to move to no state taxes states...). So that is an instant win for me. Ill income tax is aI think 4.95%. (Is it really true?? someone pinch me!!) It's true!
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seriousthistime
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Post by seriousthistime on Jun 22, 2024 13:18:52 GMT -5
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MN-Investor
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Post by MN-Investor on Jun 22, 2024 14:43:00 GMT -5
My husband used to kid that he wasn't allowed to die because that would push me into the Single tax brackets. He died. I'm in the Single tax brackets. Ouch.
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tallguy
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Post by tallguy on Jun 22, 2024 16:11:27 GMT -5
If you would look over my post after yours and let me know of any flaws in my thinking, I would greatly appreciate it! I think I am approaching my use of 401k logically with the taxes, but you never know when you might have a blind spot. As you are aware, the primary factor is your marginal tax rate while working and deferring compared to your marginal tax rate in retirement while withdrawing. The first problem is that while one is known, the other is generally a guess. Another is the uncertainty of what future tax rates will be. You are thus never really able to truly optimize the decision, and the best you can hope for is that your best educated guess will work out. I believe it is better to have a mix of taxable, tax-deferred, and tax-free investments so that you can take advantage of any eventuality. There are certainly other things to take into account. Income level can impact how much you pay for a number of things. Lower income levels allow things like health-care subsidies, property tax exemptions, utility subsidies, and any number of other social programs should one qualify. Higher incomes will make all of SS taxable, subject one to IRMAA surcharges, create much higher tax liabilities if a surviving spouse is suddenly thrust into the single bracket, and more. Again, all you can do is prepare the best you can and hope it turns out. I have a friend whose first-year RMD is $200,000 as a single. Next year will almost certainly be significantly higher. They are going to be locked into max IRMAA and a 32%+ tax rate going forward. I persuaded them to do some Roth conversions over the last few years, but they would have been much better off to have learned about conversions earlier. I on the other hand limit my income for tax purposes. I can do that because my fixed expenses are low. If I wanted and needed to though, I could have a sustainable income of maybe $80,000 or more while remaining tax-free, or higher if I wanted to pay some tax to do it. Keep learning as much as you can. Keep preparing as best you can. Then relax and enjoy your life. That is why you are doing all the work now, so don't sacrifice it or put it off until later. And don't drive yourself crazy. It will never be perfect, but it doesn't have to be. "Good enough" is still a success.
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teen persuasion
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Post by teen persuasion on Jun 22, 2024 16:53:22 GMT -5
Our savings would have been reduced by the marginal rate of taxes we paid each year on those contributions. A combined federal and state 33% marginal tax rate? Or higher? Yeah... no. I don't think it was that high. But yeah, there would have been less to invest. Offsetting that, though, was the fact that you were not limited in your investment choices when your money was in a taxable account. I remember our first companies' 401(k) plans. They had high expense ratio funds, other poor choices. Companies got wiser over time and offered better investment choices, but some of the first ones really sucked. Some companies still have poor choices available. One of the things that I did do in 2012 was a net unrealized appreciation transaction. I had company stock in a 401(k) which, by 2012 - the year I turned 59½ - was highly appreciated. It was worth 10 times what I paid for it. Heck of a deal. So I rolled the rest of my 401(k) into an IRA while transferring the company stock portion to a taxable account. I basically "un-did" the 401(k) contribution represented by those shares by paying taxes in 2012 on what had been excluded from my income in those older contribution years. While I've sold some of those shares since 2012, I still own a large number and, as of today, they are worth 47 times what I paid for them. I'm saving a HECK of a lot of taxes by having sales of those shares taxed at long term capital gains rates. I guess my husband and I never considered protecting our investments from judgements or bankruptcies. We always had umbrella insurance and medical insurance and good jobs. At any rate, I've lived this long without judgements or bankruptcies, so I guess we did ok. true about the lousy 401k fees! I had one that was trully terrible with one job - everything was around 5% either a or b fee, forget which, plus like 1-2% per year. But even with those terrible choices, my math said that saving the taxes was better than not. I have access to a roth 401k right now, but I would have to invest a lot if I didn't get the tax break. 8800 per year to taxes (fed and state) instead of the investments, and likely more as I might get bumped up into the next fed tax band with my bonus and side biz income. When working on my side biz - I work nights and weekends till project is done. I charge a nice rate, but the taxes are high too! Thinking of losing more of that after all the time I've given up and stress I take on for it is a tough call for me! One you get to withdrawing, you get to fill up the deduction and then the lower tax tiers, and some people can avoid a tax band or two in retirement. Plus - it seems the state of Illinois does not tax 401k withdrawals! I can hardly beleive this is true! (but makes sense if the trying to get retirees not to move to no state taxes states...). So that is an instant win for me. Ill income tax is aI think 4.95%. (Is it really true?? someone pinch me!!) So based on current tax brackets: for me, money going into 401k is escaping 24% fed and 4.95% state taxes. I likely won't be able to escape the 24% fed rate in retirement, I'm afraid, do to having so many debt repayments and some other higher than I'd like expenses (many cats, and feeding ferals too. high property taxes, ~10% sales tax, etc.). But, I'll get to bypass state income tax, have over 11k free from fed tax, and then another 35k at the 12% rate. The 22% rate isnt a huge break off of 24%, but already the savings here seem very worth it to me. My forray into the 24% bracket would be very minimal, and hopefully not every year! So if you think about what rate your money would have been taxes going in - say 20% if you don't like 30%. Then you'd have 20% less money in taxable or roth accounts than you have in 401k. If your effective tax rate after filing is about 20% - then it is a wash (bypassing any fees discussion. By now you might have rolllover into a self directed IRA, if not you should! and can have the same fees/lack of fees in either scenario). So if you get a RMD of 100k, and you don't need 50k of it, pay the taxes, and then put the 40k left over into taxable and call it even. The irmaa is the other thing, but up to 350 extra a month for insurance seems like you just don't get a discount like the more marginally situated seniors. I think taxes just hurt more when you have the money in hand and have to hand it over! I think that is why they take it out of our checks as we go along.....likely riots if people got the money and then had to hand it over later....we'd all feel the tax pain much more acutely. Right. You have to look at your marginal rate now, vs your marginal rate later. If they are the same, it's a wash. It's only "wrong" to do Roth if you obviously have a high marginal rate now and would have a low marginal rate later - you are prepaying unnecessary taxes. But marginal rates can be hard to pin down. My marginal rate now is much higher than most would think, because of those credit phaseouts that stack. Once we have no dependents, credits go away, and marginal rate becomes bracket rate. In the future, marginal rates could include SS taxation if you are in the nose cone of the SS tax torpedo, and IRMAA if your income is in range and your age is right, or LTCG rising above the zero bracket because other income bumps it up, or NIIT if totals are higher, etc. Some of those shadow rates go away once your numbers are high enough -- once SS is fully taxed at 85%, once all LTCG reach 15%. Others just tack an extra few % (or $$) on as things go up (IRMAA, NIIT) and never go away. Bogleheads talk about the asymmetry of the traditional vs Roth choice. You can always start with traditional and make it Roth later by paying the tax. But you can't do the reverse, and get the tax back if you goofed. The other half of the asymmetry is if things do or don't go well -- if you use traditional, it allows you to save more because of the tax deferral. If things go badly, you will have as much as you could manage and likely at least be in a lower bracket and lose less to taxes. If things go well, hooray, you have too much money, and owe more in taxes (but have plenty of money to pay it from). If you use Roth and prepay taxes while employed, and things go badly, you have much less saved. You owe no taxes, but you probably paid more beforehand than you would now. If things go well, hooray, lots of money AND no taxes. But it's the worst case scenario you need to plan for - things go unexpectedly badly - I'd rather have the bigger traditional balance, not the smaller Roth balance, when every dollar counts. The other big thought is: this isn't a one and done decision. You get to revisit it every year, because conditions change. There's lots of tricky little sweet spots hidden in the spectrum of income, especially with different types of income. I avoided taxable accounts, because investment income could disqualify us from EITC at a relatively low number, used to be $3k, now it's $10k ish. It wasn't a hard decision, because we honestly didn't have enough to max out tax deferred accounts and run out of space, but some people want more in taxable for liquidity, or whatever, and prioritize that over tax deferred. But it meant I needed to figure out how to access $$ in tax deferred early w/o penalty, and it means I have all OI and no lower taxed LTCG income in retirement. Tradeoffs. Another random clarification: you want to look at marginal rate going into the tax deferred, because those $$ would be either left on the top, or shifted off into tax deferred. When looking at retirement tax rates, you also look at your top marginal rate, not the standard deduction and lower brackets creating a blended effective rate, because all your existing tax deferred balance (and its future growth) is already filling those lower brackets. Your newest contributions are going to stack on top, increasing balances, possibly increasing your top rate. And next year's contributions stack on top of those... At some point , if the balance gets high enough, it may make sense to switch to Roth because the future marginal rate becomes higher. Rukh, you're already working in the Single tax paradigm, that won't change for you. Those of us in MFJ should plan for when one spouse gets forced down to single, but it's hard to plan for - don't know when it will occur. Also hard to shift your mind to that new paradigm after decades planning in MFJ numbers. ETA: I see Tallguy was making many of the same points, while I was writing my wall of text.
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tallguy
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Post by tallguy on Jun 22, 2024 20:11:53 GMT -5
ETA: I see Tallguy was making many of the same points, while I was writing my wall of text. Getting it posted sooner. The benefit of writing a slightly shorter wall of text.
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Rukh O'Rorke
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Post by Rukh O'Rorke on Jun 22, 2024 23:00:23 GMT -5
Rukh, you're already working in the Single tax paradigm, that won't change for you. Aw man! Bummmer! ![](https://i239.photobucket.com/albums/ff155/JiminiChristmas/ymamsmiles/rofl.gif)
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tallguy
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Post by tallguy on Jun 22, 2024 23:26:58 GMT -5
Rukh, you're already working in the Single tax paradigm, that won't change for you. Aw man! Bummmer! ![](https://i239.photobucket.com/albums/ff155/JiminiChristmas/ymamsmiles/rofl.gif) Hey! On the bright side marrying someone poor will save you money on taxes!
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Rukh O'Rorke
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Post by Rukh O'Rorke on Jun 22, 2024 23:41:59 GMT -5
Another random clarification: you want to look at marginal rate going into the tax deferred, because those $$ would be either left on the top, or shifted off into tax deferred. When looking at retirement tax rates, you also look at your top marginal rate, not the standard deduction and lower brackets creating a blended effective rate, because all your existing tax deferred balance (and its future growth) is already filling those lower brackets. Your newest contributions are going to stack on top, increasing balances, possibly increasing your top rate. And next year's contributions stack on top of those... At some point , if the balance gets high enough, it may make sense to switch to Roth because the future marginal rate becomes higher. ooo! this is deep, and exactly why I asked your opinoin because you see things from so many different angles. I had never thought of it this way, and you are absolutely right, and now I need to rethink everything. I will be relying heavily on the 401k money for 8-9 years before getting soc sec. If I do a spreadsheet, input market average returns, and expected money taken out between retirement and social security, the 401k money actually grows quite a bit until 72. and the rmd would be based on a very nice pile of money. I think great! time to retire! But take the same info and model it, I have 20% chance of failure! Potentially running out of money starting as early as 72. I feel like you either risk going broke spectacularly or you end up super rich! There isn't a middle ground...or rather, you have to work so much extra to guard against the unlikely disaster scenario.....
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MN-Investor
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Post by MN-Investor on Jun 23, 2024 0:09:59 GMT -5
Another off the wall comment.
My husband and I planned on doing Roth conversions during the low income years between his retirement and our taking social security at age 70. But I also had a significant investment in highly appreciated stock of my former employer (see my post above about net unrealized appreciation transactions) and I needed to sell some of those shares and instead have the money in a stock fund. So, something also to do during those low tax years.
But... oops.
Do NOT do a Roth conversion when you have significant long term capital gains. It will push those long term capital gains right out of the 0% tax bracket. Fortunately I ran the numbers before we did the Roth conversion so I saw the problem. Make sure you watch for unfortunate taxable interactions.
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teen persuasion
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Post by teen persuasion on Jun 23, 2024 11:49:31 GMT -5
Another random clarification: you want to look at marginal rate going into the tax deferred, because those $$ would be either left on the top, or shifted off into tax deferred. When looking at retirement tax rates, you also look at your top marginal rate, not the standard deduction and lower brackets creating a blended effective rate, because all your existing tax deferred balance (and its future growth) is already filling those lower brackets. Your newest contributions are going to stack on top, increasing balances, possibly increasing your top rate. And next year's contributions stack on top of those... At some point , if the balance gets high enough, it may make sense to switch to Roth because the future marginal rate becomes higher. ooo! this is deep, and exactly why I asked your opinoin because you see things from so many different angles. I had never thought of it this way, and you are absolutely right, and now I need to rethink everything. I will be relying heavily on the 401k money for 8-9 years before getting soc sec. If I do a spreadsheet, input market average returns, and expected money taken out between retirement and social security, the 401k money actually grows quite a bit until 72. and the rmd would be based on a very nice pile of money. I think great! time to retire! But take the same info and model it, I have 20% chance of failure! Potentially running out of money starting as early as 72. I feel like you either risk going broke spectacularly or you end up super rich! There isn't a middle ground...or rather, you have to work so much extra to guard against the unlikely disaster scenario..... But again, it's not a binary decision. If SORR raises its ugly head, you can always pivot and start SS earlier. Even retroactive 6 months, I believe. We are going to rely on tax advantaged money for possibly a dozen years before getting SS, and we are already partially in drawdown mode. I PLAN to have both of us wait to 70 to give more time/space for conversions, but I'm exploring ALL options. OpenSS says I should start SS at 62, 8 years of forgoing even a small payment is lost $$. So how much smaller would our future combined SS payments be? And how much less would I convert each year if keeping the same tax cost, or how much more tax would we pay each year to convert my planned amount? Oh, what about ACA subsidies? I have a hard AGI limit to stay in an Essential Plan at zero premium, assuming that doesn't change in the meantime... What if DH dies unexpectedly early, before reaching 70? Then my survivor benefit is less - how do I maximize that? On and on with the what ifs. I'm mentally dividing things up into different time chunks: now w/part-time income + conversions, no earned income + all conversions + ACA, all conversions + Medicare, SS + smaller conversions, SS + RMDs + tiny conversions if room, one of us begins to file single. Not sure when that last one slots in. The really big shift is before/after SS. Trying to figure out if the stash would last based on withdrawal rates is hard with more early/less later. I've been viewing our retirement income as two layers, dividing the stash mentally in two chunks. One chunk is the SS bridge fund, the remainder gets a standard 4% applied to it. I only use the higher SS (because eventually one spouse's goes away, don't want to build both parts into the long-term plan), and use the FRA amount (compensating based on projected SS cuts or if DH dies early that's the max I can count on), say it's $28k. Multiply that times 12, that's $336k, subtract that from our total. If the remainder is ~$725k the 4% rule would allow us another $29k, for an annual total around $57k. That's pretty roughly what I want to Roth convert each year, $56k could be state tax free, federal tax would be mostly in the 10% bracket after the standard deduction, and my ACA cap should be something close to that. But that doesn't mean I plan to spend that whole amount, its more than we have been spending. All withdrawals will come from previous Roth contributions and conversions. Extra spending is likely to be on the house, and things that will reduce future expenses like insulation, new heating system (not oil), etc. I figure it's worth spending an extra $25k from the stash if it reduces future expenses by $1k or more annually. I've played with RPM from bogleheads to see if I could Roth convert enough in many tiny bites to keep RMDs no larger than our desired withdrawal to supplement SS income (not be forced to withdraw and pay tax on unneeded $$), or even convert it all. It really depends on returns. Returns are low, I can convert most/all, but there's less money. Returns are great, I get less converted, more RMDs to be taxed, but it's a good problem to have and there's plenty to pay the tax from, or donate to charity instead! I'll keep watching and tweaking, refining my plan as I go along, trying to get it simpler for DH's sake.
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Rukh O'Rorke
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Joined: Jul 4, 2016 13:31:15 GMT -5
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Post by Rukh O'Rorke on Jun 23, 2024 19:26:05 GMT -5
ooo! this is deep, and exactly why I asked your opinoin because you see things from so many different angles. I had never thought of it this way, and you are absolutely right, and now I need to rethink everything. I will be relying heavily on the 401k money for 8-9 years before getting soc sec. If I do a spreadsheet, input market average returns, and expected money taken out between retirement and social security, the 401k money actually grows quite a bit until 72. and the rmd would be based on a very nice pile of money. I think great! time to retire! But take the same info and model it, I have 20% chance of failure! Potentially running out of money starting as early as 72. I feel like you either risk going broke spectacularly or you end up super rich! There isn't a middle ground...or rather, you have to work so much extra to guard against the unlikely disaster scenario..... But again, it's not a binary decision. If SORR raises its ugly head, you can always pivot and start SS earlier. Even retroactive 6 months, I believe. We are going to rely on tax advantaged money for possibly a dozen years before getting SS, and we are already partially in drawdown mode. I PLAN to have both of us wait to 70 to give more time/space for conversions, but I'm exploring ALL options. OpenSS says I should start SS at 62, 8 years of forgoing even a small payment is lost $$. So how much smaller would our future combined SS payments be? And how much less would I convert each year if keeping the same tax cost, or how much more tax would we pay each year to convert my planned amount? Oh, what about ACA subsidies? I have a hard AGI limit to stay in an Essential Plan at zero premium, assuming that doesn't change in the meantime... What if DH dies unexpectedly early, before reaching 70? Then my survivor benefit is less - how do I maximize that? On and on with the what ifs. I'm mentally dividing things up into different time chunks: now w/part-time income + conversions, no earned income + all conversions + ACA, all conversions + Medicare, SS + smaller conversions, SS + RMDs + tiny conversions if room, one of us begins to file single. Not sure when that last one slots in. The really big shift is before/after SS. Trying to figure out if the stash would last based on withdrawal rates is hard with more early/less later. I've been viewing our retirement income as two layers, dividing the stash mentally in two chunks. One chunk is the SS bridge fund, the remainder gets a standard 4% applied to it. I only use the higher SS (because eventually one spouse's goes away, don't want to build both parts into the long-term plan), and use the FRA amount (compensating based on projected SS cuts or if DH dies early that's the max I can count on), say it's $28k. Multiply that times 12, that's $336k, subtract that from our total. If the remainder is ~$725k the 4% rule would allow us another $29k, for an annual total around $57k. That's pretty roughly what I want to Roth convert each year, $56k could be state tax free, federal tax would be mostly in the 10% bracket after the standard deduction, and my ACA cap should be something close to that. But that doesn't mean I plan to spend that whole amount, its more than we have been spending. All withdrawals will come from previous Roth contributions and conversions. Extra spending is likely to be on the house, and things that will reduce future expenses like insulation, new heating system (not oil), etc. I figure it's worth spending an extra $25k from the stash if it reduces future expenses by $1k or more annually. I've played with RPM from bogleheads to see if I could Roth convert enough in many tiny bites to keep RMDs no larger than our desired withdrawal to supplement SS income (not be forced to withdraw and pay tax on unneeded $$), or even convert it all. It really depends on returns. Returns are low, I can convert most/all, but there's less money. Returns are great, I get less converted, more RMDs to be taxed, but it's a good problem to have and there's plenty to pay the tax from, or donate to charity instead! I'll keep watching and tweaking, refining my plan as I go along, trying to get it simpler for DH's sake. thanks! good perspective to keep in mind.
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lurkyloo
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Post by lurkyloo on Jun 24, 2024 9:36:34 GMT -5
I’m glad someone brought up state tax treatment. ![](https://i239.photobucket.com/albums/ff155/JiminiChristmas/ymamsmiles/smile.gif) It’s worth double checking the specifics though. Maryland doesn’t tax 401k withdrawals or I think pensions, does tax IRA withdrawals, and I believe there is an income limit involved as well. My personal plan is to die in a different state, since MD has both estate and inheritance taxes, but I guess we’ll see how that works out. Hm, I wonder if you could get around that by gifting, if you had some advance warning.
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