IRA withdrawal tax strategy

[Trawler]

If you have a High Deductible Health Insurance Policy that is HSA compatible you can contribute up to $6,650 for a family plus if over 55 add $1,000 into a Health Savings account and this becomes a non itemized deduction on front page of 1040 tax return. This give you the more funds to convert from IRA to Roth.

[gerntz]

Quote:

Originally Posted by gerntz IRA RMD's + full SS benefits will ultimately create more yearly income for you that you can't avoid.

I forgot about (at least) one thing here: you can avoid some RMD income & thus taxes by gifting to charities directly from the IRA once you reach age 70.5. Tax law was recently permanently changed to make these gifts part of your RMD & not count as income. That's a better deal than taking the RMD income & then gifting. Net, as you approach age 70.5, may want to delay gifts till you reach 70.5 & then gift more.

[woodguy00]

Ticker,

You mention delaying social security a few months next year and I see from another post that suggests you plan on taking SS at age 62. Have you investigated alternate claiming strategies ? Perhaps you would be better using your IRA's early and delaying SS. Most analysis leans in that direction particularly if you have been the higher earning spouse. Food for thought.

[Hermit]

Quote:

Originally Posted by gerntz I forgot about (at least) one thing here: you can avoid some RMD income & thus taxes by gifting to charities directly from the IRA once you reach age 70.5. Tax law was recently permanently changed to make these gifts part of your RMD & not count as income. That's a better deal than taking the RMD income & then gifting. Net, as you approach age 70.5, may want to delay gifts till you reach 70.5 & then gift more.

I'm 65 and have committed a large sum to my favorite charity. The cash is sitting in a bank, but I don't count it as mine. When I reach 70.5, I will start moving it over to the charity, unless they need it prior to that. I'm in the 25% bracket and will never be lower. I'll be in the 28% bracket when RMDs kick in, but I don't think I can do much about that beyond the charitable gifts. Nice to know they finally made the charitable withdrawal for RMDs permanent.

[pb4uski]

Quote:

Originally Posted by gerntz I forgot about (at least) one thing here: you can avoid some RMD income & thus taxes by gifting to charities directly from the IRA once you reach age 70.5. Tax law was recently permanently changed to make these gifts part of your RMD & not count as income. That's a better deal than taking the RMD income & then gifting. Net, as you approach age 70.5, may want to delay gifts till you reach 70.5 & then gift more.

Especially if you don't otherwise have itemized deductions that are at least equal to the standard deduction before the gift or are in itemized deduction phase-out land, etc.

Quote:

Originally Posted by Hermit I'm 65 and have committed a large sum to my favorite charity. The cash is sitting in a bank, but I don't count it as mine. When I reach 70.5, I will start moving it over to the charity, unless they need it prior to that. I'm in the 25% bracket and will never be lower. I'll be in the 28% bracket when RMDs kick in, but I don't think I can do much about that beyond the charitable gifts. Nice to know they finally made the charitable withdrawal for RMDs permanent.

Sounds like you might be better off to keep the cash since you have already paid tax on that money and gift the same amount from your IRA to the charity.

[kaneohe]

Quote:

Originally Posted by gerntz ............ Tax law was recently permanently changed to make these gifts part of your RMD & not count as income. .............

I'm assuming you mean QCDs here? I'd love to have this be true but my impression is that it was not permanently changed.......just the usual retroactive for 1 yr dance that they've done for the last few yrs.
New Law Renews IRA Transfers to Charity for 2014; Owners Must Act by Dec. 31

If you have other info, please let us know.

[gerntz]

Quote:

Originally Posted by kaneohe I'm assuming you mean QCDs here? I'd love to have this be true but my impression is that it was not permanently changed.......just the usual retroactive for 1 yr dance that they've done for the last few yrs. New Law Renews IRA Transfers to Charity for 2014; Owners Must Act by Dec. 31 If you have other info, please let us know.

See Publication 590-B (2014), Distributions from Individual Retirement Arrangements (IRAs)

which discusses 2015 RMD's and then look under

Miscellaneous Rules for Required Minimum Distributions

where it discusses QCD's & their counting towards RMD's. And there's no discussion that this is a one year thing as in the past.

[Hermit]

Quote:

Originally Posted by pb4uski ... Sounds like you might be better off to keep the cash since you have already paid tax on that money and gift the same amount from your IRA to the charity.

Exactly. As I gift money from the IRA I will move cash to my spending or investment accounts. In the mean time, the gifted cash will stay in it own bank account because I don't think of it as mine. Its for a construction project and they are not ready to begin that yet.

[kaneohe]

Quote:

Originally Posted by gerntz See Publication 590-B (2014), Distributions from Individual Retirement Arrangements (IRAs) which discusses 2015 RMD's and then look under Miscellaneous Rules for Required Minimum Distributions where it discusses QCD's & their counting towards RMD's. And there's no discussion that this is a one year thing as in the past.

Both the IRS link I posted and this Fairmark Forum :: Retirement Savings and Benefits :: QCD Extended retroactively for 2014 refer to an extension. The fairmark thread is clear that it is for 2014 only. The Publication does not mention either the extension or the fact that it is permanent . I would not conclude that the QCD is permanent from that.

https://www.kitces.com/blog/tax-exte...beneficiaries/

[gerntz]

Quote:

Originally Posted by kaneohe Both the IRS link I posted and this Fairmark Forum :: Retirement Savings and Benefits :: QCD Extended retroactively for 2014 refer to an extension. The fairmark thread is clear that it is for 2014 only. The Publication does not mention either the extension or the fact that it is permanent . I would not conclude that the QCD is permanent from that. https://www.kitces.com/blog/tax-exte...beneficiaries/

OK. But I'm telling you the IRS link I provided a) specifically discusses 2015 RMD's & b) the QCD is exempted in that same link. What else can it mean than for 2015? Also, there's no mention of it expiring.

I suggest your links are older than mine. I also recollect reading/hearing the law being changed to make this permanent but can't find anything about that tax act now.

[kaneohe]

Quote:

Originally Posted by gerntz OK. But I'm telling you the IRS link I provided a) specifically discusses 2015 RMD's & b) the QCD is exempted in that same link. What else can it mean than for 2015? Also, there's no mention of it expiring. I suggest your links are older than mine. I also recollect reading/hearing the law being changed to make this permanent but can't find anything about that tax act now.

My interpretation is that the 2014 Pub 590 was held pending last minute Congressional action and then rushed into print. 2015 RMDs are discussed because their amount is determined by their 2014 year end value and that is useful to know for planning purposes. QCDs are discussed because they can
relate to 2014 taxes which is the primary function of a 2014 Publication.
The publication does not say specifically that QCDs are available in 2015.

Congressional action to extend the QCD for 2014 came at the last minute in
2014 as it did in past years. It would be a stretch of my imagination to believe that Congress would exert itself in Dec . 2014 for a temporary extension for QCDs and then subsequently come back a short time later and make them permanent. I'm pretty sure if that happened it would be big news and we would have no trouble finding links.

I'd love for that to be true though so if you do find a link , please post it.

[kaneohe]

Seems that the House passed a bill to restore it permanently in Feb 2015 but I haven't found anything further re: Senate/President signing.........
https://www.independentsector.org/ira_rollover

[Happily Retired]

Quote:

Originally Posted by Corporate ORphan Don't want to hijack this thread but it brings up a point we are considering now. We are currently in the 15% tax bracket. We are looking to get a ACA subsidy if BCBS doesn't renew our non-ACA compliant policy so we were thinking of converting some of our IRA into a Roth this year. We were thinking of using the conversion to reduce RMDs in the future. Anyone have a way to determine how much makes it worthwhile if it pushes you to the 25% or greater tax bracket? We are both 59.

CorporateORphan:

Very good to see your post on this subject. My wife and I are both 59 and have a similar situation. Our spreadsheet maps the route well. Yes, some things will surely change, but even if they do I see that we're in nice shape.

We FIRE both of our employers at the end of 2017. We'll have 70% of our assets in tax deferred accounts ( taxable IRAs). We will be maxing out the 15% tax bracket in staying as tax-efficient as possible. Age 70 and later, as new revenue sources enter (MRDS, small non-COLA pensions and Social Security), we see 15% tax bracket headroom during IRA draw down almost go away. THEN the 2033 (or whatever year this happens) Social Security REDUCTION to 75 cents on the dollar comes to the rescue and allows us much new room to:

a. Stay in the 15% tax bracket
b. Chip away and continue the draw down of the remaining $313k in taxable IRAs
c. Watch the MRDS go DOWN each year due to reduced tax deferred $$

Who would have thought that we would benefit from the Social Security 75% reduction? Cool!

Our current FIRE timeframe is EOY 2017. We've been holding off retiring due to our only child (son) still in college. He graduates in May of 2017. We want to make sure he gets a good launch.

We may decide to FIRE our employers at the same time our son graduates. If so, it would be a double graduation party! Our son graduates from college and we graduate to life after working or retirement!

Feel free to contact me directly if you feel that I could help you. Things that we share:

a. Ages, 59, for us and spouses
b. Desire for ACA subsidized healthcare before Medicare happens
c. Need to drawdown and/or convert taxable IRAs
d. Desire to remain as tax efficient as possible. For us this means staying in the 15% tax bracket during the draw down period.
e. I was a corporate orphan twice. A non-profit job currently keeps me busy.


Oh, the information that comes with being about to project your financial situation into the future. Yes, there are risks involved with this and again, yes, things will surely change. Understood.

However, there is nothing more powerful and comforting when answering that haunting question for yourself: "Will we have enough to retire on". I can say with certainty that YES, we will!

So, anyone who hasn't already started your own spreadsheet, don't put it off any longer. It provides VERY powerful information and real peace of mind. Get started today!

P.S. During MRD calculations don't forget that Soc Sec is taxed at a MAXIMUM of 75%. Don't have it in your spreadsheet as 100% taxable as I did initially. Also MRDs, year one, start at 3.7% of your taxable IRA balance, increment by .2 per year, so 10 years later are 5.5%...

Good luck and go speadsheeting! They truly become a labor of love.

- Gary

[Happily Retired]

Our spreadsheet is complemented by using TurboTax Deluxe. The spreadsheet handles most of the future projections. We use TurboTax for the taxation portion.

It would be very nice if there was a way to use pointers or links between the two of them similar to working on one Excel spreadsheet Worksheet and pointing/linking/referencing cells on another Worksheet in the spreadsheet.http://www.early-retirement.org/foru...lies/blink.gif

Use of these two provides all the info that we need to feel confident in our decisions. We've run the spreadsheet results by a few financial planner types. After answering their numerous questions they run Monte Carlo projections. The results are very much the same as what our spreadsheet generates. So, I'm very happy with using a spreadsheet for most of it and doing tax projections using TurboTax. I remind myself that TurboTax 2014, for example, is using the tax rules of the day (e.g. tax bracket maximums, etc.). We make allowances for this the best that we can. All-and-all... very happy with this combination of financial forecasting tools.
http://www.early-retirement.org/foru...ies/smiley.gif

[kaneohe]

Quote:

Originally Posted by ThisIsHowWeRoll :don't forget that Soc Sec is taxed at a MAXIMUM of 75%.

[pb4uski]

Quote:

Originally Posted by ThisIsHowWeRoll Our spreadsheet is complemented by using TurboTax Deluxe. The spreadsheet handles most of the future projections. We use TurboTax for the taxation portion. ....

What I did is I built a simplified tax calculation into my model. It is dividends + LTCG + Roth conversion - HSA contributions - medical expenses in excess of 10% of AGI - property taxes - prior year state income taxes - contributions - home mortgage interest - exemptions and then applying the tax calculations based on current tax rates and brackets, assuming the rate stay the same but the brackets increase for inflation. If i do a taxcaster calculation using the same info it comes out close but is different because I am using the 2015 exemptions and tax brackets and taxcaster uses the 2014 exemptions and tax brackets.

It was a bit of a bear to build into the spreadsheet, but it works well.

[Happily Retired]

Quote:

Originally Posted by kaneohe

Happy spreadsheeting... Without them one is just wondering and worrying.

[kaneohe]

Quote:

Originally Posted by ThisIsHowWeRoll Happy spreadsheeting... Without them one is just wondering and worrying.

Was just wondering where the 75% taxation of SS came from?

[Happily Retired]

Quote:

Originally Posted by kaneohe Was just wondering where the 75% taxation of SS came from?

Google: "Projected Trust Fund Exhaustion". 2033 is when the Social Security trust fund is exhausted to the point where benefits should reduce to 75% of what they should be.

It's not 75% taxation of SS, but 75%... or 75 cents on the dollar of what the benefits normally would have been. Hope this helps.

[Hermit]

Quote:

Originally Posted by ThisIsHowWeRoll Google: "Projected Trust Fund Exhaustion". 2033 is when the Social Security trust fund is exhausted to the point where benefits should reduce to 75% of what they should be. It's not 75% taxation of SS, but 75%... or 75 cents on the dollar of what the benefits normally would have been. Hope this helps.

I thought he was referring to the fact that at most you are taxed on 75% of SS income.