All my greenback are in qualified plans

[Rich_by_the_Bay]

It occurred to me after paying off a mortgage and buying an RV within a short period of time, that all our money except emergency funds are in qualified plans, IRAs and 403Bs, mostly. The amount is on target for our plans, so that's less an issue that where it resides.

We are vigorously stashing our after tax dollars that used to go to the mortgage so it's growing but still relatively small. Plan is semi-retirement in 1-3 years, eating what we kill essentially, for about another 3-5 years. I'm 57.

Is this a problem, having almost all the money in sheltered plans as long as we won't be touching it til after 59.5 years of age?

 

[d]

why would it be a problem?

 

[Martha]

It isn't a problem, but you do have less flexibility for tax planning.

One thing to look at when your income drops is contributing to a Roth. Also, provided the law doesn't change, in 2010 when there is no conversion limits on the Roth, you may consider running the numbers and possibly converting some of your IRAs to Roths. One upside of the Roth, besides being able to take the growth out tax free, is that there are no required minimum distributions.

I have thought about contributing to a non-deductible IRA and when our income drops low enough, then convert to a Roth. Or wait until 2010, then convert.

 

[Rich_by_the_Bay]

One thing to look at when your income drops is contributing to a Roth. Also, provided the law doesn't change, in 2010 when there is no conversion limits on the Roth, you may consider running the numbers and possibly converting some of your IRAs to Roths. One upside of the Roth, besides being able to take the growth out tax free, is that there are no required minimum distributions.

Yes, a good reminder. Roths have never been on my radar screen but may be worth evaluating. Perhaps like you, I am blessed with a decent enough income that even part-time I will be in a substantial tax bracket, so maybe it would be wise to defer until I really retire, say at 65.

 

[Martha]

What are your wife's plans? Is she going to cut back or retire in the same time line as you?

 

[hogwild]

I'm in the same boat. This does pose somewhat of a problem with the RMD. It requires withdrawals at a much higher percentage than I would like once you get into your 80s.

The question I have about RMDs is can you transfer funds, in kind, from your IRA to a taxable account to avoid capital gains? In other words, can I just move some or all of a mutual fund from my IRA to a taxable account with redeeming it? It would seem that, otherwise, you would have to pay regular income taxes on the withdrawal plus capital gains.

 

[Martha]

I don't quite get what you are asking. If you simply cash in the asset from the IRA, and take the cash out and buy a stock, you will pay income taxes on the IRA distribution. No capital gains are due until you sell the stock you bought. And the gain you pay taxes on is only the increase in value over and above what you paid for it.

Also, even if you could move the mutual fund directly in kind from the IRA to a taxable account, the result would be the same. You would pay income taxes on the amount distributed to the taxable account.

 

[riskadverse]

I'm in the same boat. This does pose somewhat of a problem with the RMD. It requires withdrawals at a much higher percentage than I would like once you get into your 80s.

The question I have about RMDs is can you transfer funds, in kind, from your IRA to a taxable account to avoid capital gains? In other words, can I just move some or all of a mutual fund from my IRA to a taxable account with redeeming it? It would seem that, otherwise, you would have to pay regular income taxes on the withdrawal plus capital gains.

I believe you would always have to liquidate the mutual funds because for tax purposes RMD's will be taxed at income rates not capital gain rates and thus no capital gain taxes are due.

 

[donheff]

It isn't a problem, but you do have less flexibility for tax planning.

One thing to look at when your income drops is contributing to a Roth. Also, provided the law doesn't change, in 2010 when there is no conversion limits on the Roth, you may consider running the numbers and possibly converting some of your IRAs to Roths. One upside of the Roth, besides being able to take the growth out tax free, is that there are no required minimum distributions.

I have thought about contributing to a non-deductible IRA and when our income drops low enough, then convert to a Roth. Or wait until 2010, then convert.

Martha:

I am in a worse situation than Rich (taxwise, very good from other perspectives). I have an $80K pension about 90% of which is taxed as income. We have about 70% of our portfolio in qualified plans so we face several years of moderatly high taxes while we supplement the pension with taxed funds and then a prolonged period of high taxes as we tap the qualified funds.

When I read about Roth conversions, I concluded that since I will already be at a relatively high bracket no matter what, it will never be in my interest to pull extra funds from the qualified plans and convert to a Roth. The only exception I can see is if RMDs are high enough that I have excess funds to reinvest (quite possible after 70).

Can I go back to sleep on the Roth question or are there factors I am missing?

Thnx - Don

 

[2B]

This does pose somewhat of a problem with the RMD. It requires withdrawals at a much higher percentage than I would like once you get into your 80s.

In the world of finacial planning, that is the best problem to have. Take your RMD, pay taxes and save in after tax what you don't spend. It sure beats running out of money in your 80s.

 

[Martha]

When I read about Roth conversions, I concluded that since I will already be at a relatively high bracket no matter what, it will never be in my interest to pull extra funds from the qualified plans and convert to a Roth. The only exception I can see is if RMDs are high enough that I have excess funds to reinvest (quite possible after 70).

Can I go back to sleep on the Roth question or are there factors I am missing?

Thnx - Don

Go back to sleep.

I would just keep in in the back of your mind to see if there is any year where it may make sense. Maybe consider it some year before you reach RMDs when you don't have a lot a cash needs beyond your pension so you can manipulate your tax bracket down somewhat.

The top of the 15% tax bracket for married filing joint in 2006 is $61,300 and $123,700 is the top of the 25% bracket.

The standard deduction for married filing jointly is $10,300 for 2006. Personal exemptions at $3300 each. So, you could have $78,200 of income and stay in the 15% bracket. These numbers should go up over the years, unless of course the tax law changes again. Even if you fall out of the 15% bracket maybe it still could make sense to convert even in the 25% bracket, especially if you are facing even higher brackets with RMDs. Who knows. Lots of variables because we don't know where tax rates will go in the future.

 

[Nords]

Can I go back to sleep on the Roth question or are there factors I am missing?

Sorry, we don't get many conversion questions at that level of taxation!

You're gonna have to do some math. If your IRA RMDs push you from the 15% bracket to the 25% or even (gulp) higher brackets then it might be worth the effort to convert a little every year to the top of the 15% bracket... or even to the top of the 25% bracket. If you're also paying state/locality taxes then RMD taxes might be even more severe.

You'll have to estimate how much your traditional IRAs will grow by your 70th year and then calculate the RMD. Then compare that taxation to a Roth conversion, simply cashing in your SWR from taxable funds, and only tapping the Roth if you want to.

You'll also have to consider the fact that your Social Security distributions will be fully taxed, but they're probably going to be fully taxed due to your pension income whether or not you're taking RMDs.

As for paying the taxes now, read the board's old threads on Roth conversions and consider paying the conversion taxes out of taxable funds (not out of the traditional IRAs). You'll effectively boost the size of the Roth by the taxes paid from outside the IRAs. Of course cashing in some taxable funds will also result in a greater income and thus a higher tax due during the year of the conversion, but hopefully that tax is at long-term cap gains rates rather than income rates.

 

[JohnEyles]

In other words, can I just move some or all of a mutual fund from my IRA to a taxable account with redeeming it?

Doesn't answer your question, but I wondered, and was told by Schwab ...
that I CAN move assets "in kind" from regular IRA to Roth (I have both
accounts with them). So obviously nice to wait for a "dip" before doing so.

 

[Rich_by_the_Bay]

What are your wife's plans? Is she going to cut back or retire in the same time line as you?

No idea; she is a realtor and that is a very up and down business. I think she'll keep working as long as it's fun and doesn't interfere with our non-work lifestyle too much, but it's too uncertain to plan on. If her income keeps us in the upper brackets, the Roth will just have to wait. Nice problem to have.

 

[hogwild]

Doesn't answer your question, but I wondered, and was told by Schwab ...
that I CAN move assets "in kind" from regular IRA to Roth (I have both
accounts with them). So obviously nice to wait for a "dip" before doing so.

Thanks much. That's the answer I was hoping for.