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Help with Mom's accounts
Old 08-16-2012, 11:38 AM   #1
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Help with Mom's accounts

My Mom is approaching 70 years old and is worried about paying taxes on her RMDs.

Would a back door Roth conversion make sense?

I mentioned Vanguard to her, but she says she wants something insured. I always thought Vanguard mutual funds were insured via the SIPC but have questions about that after reading the Vanguard page on insurance.

What other methods are available to slow down the RMD or arrange assets to minimize the tax implications?

I am thinking of steering her toward a financial planner, but really would like to educate myself a bit first. I am pretty good on the savings part of investing, but not on the dissipation.

She doesn't "need" the RMD money so doesnt want to pay taxes on the distributions.

She has a mix of my late fathers IRAs and her own, as well as two annuities which she is considering getting her money out of.

I'd like to suggest Vanguard (Wellesly or something similar) but unsure of the insurance issue.
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Old 08-16-2012, 01:24 PM   #2
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SIPC isn't insurance the way FDIC is.

It guarantees that the underlying assets will stay... but not that they'll be worth anything.

So if a stock or fund goes bust - you're still broke... but you still own the worthless shares.

The idea is that if your brokerage (which holds the shares) somehow were to abscond with your shares - you'd be made whole.

Does that make sense?
(Please correct me if I'm wrong, folks.)
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Old 08-16-2012, 01:41 PM   #3
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Rodi:

I think you have the idea. If the brokerage goes bankrupt, the assets held by Mom will be protected.

Per RMDs...

The government will have it's cut. The RMD schedule just says that you have to liqidate some of your qualified assets and pay deferred income taxes on them. You don't have to spend the money after taxes have been paid ! The RMD schedule is more than fair for all but those that live really long lives.

Per the Roth conversion..

That will require Mom to pay income taxes on the converted assets. If extra money is available then it may (or may not) be advisable. Once a conversion is made though she won't have to worry about RMDs.
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Old 08-16-2012, 02:39 PM   #4
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Thanks, that's how I read the SIPC as well. I told her that just because she has to take the RMDs she doesn't have to spend it and can put it in CDs or anything else.

She seems happy living off SS and income from her laddered CDs and has not touched the principal of the IRAs for 6+ years.

Any other tips on asset dissapation or how to maximize it to avoid income tax?
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Old 08-16-2012, 04:14 PM   #5
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She could always invest the RMD money in the same fund (but in a taxable account) that the tIRA is invested in.

So if the tIRA is in XYZ mutual fund then the amount of the RMD is liquidated and reinvested in XYZ mutual fund in her taxable account.

Typically, taxes would be withheld from the RMD so it 100 is sold out of the tIRA then 80 would be reinvested in the taxable account with the 20 being remitted to the IRS. If her income is low enough, then she would get the 20 back (or perhaps only a portion of the 20) when she files her tax return.
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Old 08-16-2012, 05:31 PM   #6
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She will pay taxes on the RMDs, but she can do a couple of things.

First, she can have her IRAs invested only in assets that lose lots of money. That way, the value of the IRA will always go down and she will have less of an RMD each year and thus less taxes.

Second, she can donate lots of money to charity including the entire RMD amount. That way she gets the tax deduction and no taxes on the RMD.

One might also be able to bunch deductions in odd/even years for a small bit of tax savings. The idea is to take the standard deduction one year, then big itemize next year, then standard deduction, then big itemize, .....

Unfortunately, it is a little late to be converting to a Roth IRA. Perhaps that would have been helpful in the previous 10 years.

I looked at my octagenarian mom's tax return earlier this year. I did not see any way to reduce her taxes except to make sure the IRA was in a bond fund and no bond funds were in her taxable account.
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Old 08-16-2012, 05:44 PM   #7
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Quote:
Originally Posted by LOL! View Post
First, she can have her IRAs invested only in assets that lose lots of money. That way, the value of the IRA will always go down and she will have less of an RMD each year and thus less taxes.

Second, she can donate lots of money to charity including the entire RMD amount. That way she gets the tax deduction and no taxes on the RMD.
LOL: I don't think that losing (or not having gains) or donating the money is what the OP or the OP's mother had in mind. It's having the money in hand that's important - taxes are distasteful but secondary.

The bunched deductions planning should be done anyway in spite of what's done in an IRA.
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Old 08-16-2012, 05:53 PM   #8
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Since RMDs on the tIRA will soon be required, and taxes paid on them, seems to me converting at least some to Roth each year is worthy of study. Going forward, in a Roth at least the gains will not be taxed, plus the Roth will not require her to take an RMD.
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Old 08-16-2012, 08:37 PM   #9
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I don't see much way around taxes on RMDs but let your Mom take comfort in the fact that the income that was the original source of those RMD's delayed taxes for oodles of years and hopefully her marginal tax rate today is lower than the marginal tax rate that would have applied to the income that was deferred.

So she won!!!
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Old 08-17-2012, 06:40 AM   #10
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If you look at her 2011 1040 taxes, it will be easy to find out if she will pay any taxes at all.

Let's say she will pay $200 in additional taxes. Is it worth getting an FA involved?
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Old 08-17-2012, 09:48 AM   #11
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Oh yeah, she won. I keep reminding her that having a great income isn't something to get upset about! I say "wait a minute, you are complaining about having too much money?"

Her RMD will be $18K+/- putting her up to around 44-45K income. She's been living off her SS and rental income as well as profit from the CDs she has laddered.

I guess I was asking about a FA to see if there were any tax efficient stragegies she could use. That and I am unsure I could give her good advice at her stage of life and for the amount she has.

I'd like to have her roll it all into Vanguard for ease of management and to insure it was all low cost. Stick it in Wellesley or something similar.
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Old 08-17-2012, 03:29 PM   #12
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You can sketch out her 2012 taxes here TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator

Put in everything except the RMD and note the taxes due. Then add in the ~$18k RMD and see how it changes. I'm guessing she will be paying about 20% as the RMD will likely make more of her SS taxable.

+1 on VG. I helped my sister set up an account with them today and she chose Wellesley as well.
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Old 08-17-2012, 03:54 PM   #13
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If her income is $40k something, after deductions the taxable portion may be quite small. That means there may be room to convert a portion of the tIRA to Roth and pay little to no taxes on the dollars converted.
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Old 08-17-2012, 08:49 PM   #14
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Is this a normal worry thing for your Mom? I worry that some predator type has already contacted her about the wonderful returns from an annuity or something.
Find out who she has been talking to.

Or maybe she has been watching PBS and Ed Slott(?) He is talking about big estates with bad tax consequences but people read them as applying to their own situation.

A Roth conversion of a portion is great but that does not count towards her RMD. That means she would have to do both; increasing her tax bill. It still won't be that high.
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Old 08-18-2012, 07:24 AM   #15
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I think she is worried she will run out of money. I think she is set up pretty well. She is such a saver and LBYM type that I think she is having trouble adjusting to having to spend/withdraw the money.

She already got suckered into an annuity but is looking to get out of it now. That was about 8 years ago and I didn't know about it so was unable to give her advice.
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