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Just for dedicated, super-focused clarity: ALWAYS tax-defer right?
Old 10-16-2017, 08:57 PM   #1
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Just for dedicated, super-focused clarity: ALWAYS tax-defer right?

For someone in ER in their early 50's, living off taxable investments:

If one had zero job income, is there any reason not to max a T-IRA anyway?

Isn't the concept that being able to defer dividends and gains tax for many years worth it right then and there?

I don't quite understand RMDs yet but see how that plays a role still how could it possibly trump T-IRA contributions in an ER scenario?
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Old 10-16-2017, 09:06 PM   #2
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Must have earned income to contribute to an IRA
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Old 10-16-2017, 09:06 PM   #3
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You cannot make any contribution to an IRA if your income consists entirely of unearned taxable income from sources such as rental property, interest and dividends, pensions or annuities, or income from passive partnerships. The rules also exclude from the compensation definition any tax-exempt income from sources other than military combat pay.

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Old 10-16-2017, 09:12 PM   #4
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When I deferred compensation & put money into IRAs for many years, the rationale was that when I finally made the withdrawals, I'd be in a lower tax bracket.

So, this year I'll finally be making those RMDs & it won't surprise me if my tax bracket is higher.
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Old 10-16-2017, 09:31 PM   #5
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Absent W-2/Earned Income, there are a few strategies available to reduce taxable income. Expect the old hands will fill the gaps with any I missed:
1. HSA contribution - direction reduction of MAGI if you have the right health insurance.
2. Capital gains - not taxed until you take them, long term taxed at more favorable rates. Net losses up to $3,000 area a direct reduction of MAGI
3. Qualified Dividends are taxed at a lower rate

More of a tax management strategy - holding low turnover, low dividend funds in taxable accounts. Let it grow and deal with the capital gains on your schedule.
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Old 10-16-2017, 09:46 PM   #6
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Originally Posted by lucky penny View Post
When I deferred compensation & put money into IRAs for many years, the rationale was that when I finally made the withdrawals, I'd be in a lower tax bracket.

So, this year I'll finally be making those RMDs & it won't surprise me if my tax bracket is higher.
I have been pulling RMD's for three years now, and with SS income, we are in the 25% bracket. If I had a real taxable pension to add to that, it would be worse.
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Just for dedicated, super-focused clarity: ALWAYS tax-defer right?
Old 10-16-2017, 10:04 PM   #7
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Just for dedicated, super-focused clarity: ALWAYS tax-defer right?

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Originally Posted by aja8888 View Post
I have been pulling RMD's for three years now, and with SS income, we are in the 25% bracket. If I had a real taxable pension to add to that, it would be worse.

Although for a lot of folks, and we're in this group, we hope to come out slightly ahead. Because the amounts we deferred were solidly in the 25% or higher marginal tax brackets. Yet in retirement, while we'll likely be in similar brackets, our effective tax rate should be somewhat less after standard deduction, personal exemptions, and whatever else we can come up with.
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Old 10-16-2017, 10:09 PM   #8
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I have been pulling RMD's for three years now, and with SS income, we are in the 25% bracket. If I had a real taxable pension to add to that, it would be worse.
It's kind of one of those "good" problems to have, though, right? And would a pension on top really be "worse"?

At least not all your income is taxed at 25%
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Old 10-16-2017, 10:10 PM   #9
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Most of the pretax contributions to my old 401k were made when today's 25% bracket was the old (prior to 2001, but after 1986) 28% bracket. So, even if I am in today's 25% bracket when I take the RMDs, I am still 3% ahead. And that doesn't count the company match, which began as 50% but soon increased to 75%. That's an effortless 50%-75% return, even if I stuffed it in a mattress.
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Old 10-16-2017, 10:20 PM   #10
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It's kind of one of those "good" problems to have, though, right? And would a pension on top really be "worse"?

At least not all your income is taxed at 25%
Yes, it's a good thing. There's a lot worse situations that one can be in.

And this year is looking up since for once, we will greatly exceed the Schedule A medical deduction threshold due to almost $40K in OOP dental expenses, DW's O2 concentrator cost ($3K), various other medical devices that were not covered by Medicare ($$) , high prescription costs beyond Part D coverage for DW ($8K), and Medigap premium costs ~$5K). I know I missed a few things.
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Old 10-16-2017, 10:31 PM   #11
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Originally Posted by aja8888 View Post
Yes, it's a good thing. There's a lot worse situations that one can be in.

And this year is looking up since for once, we will greatly exceed the Schedule A medical deduction threshold due to almost $40K in OOP dental expenses, DW's O2 concentrator cost ($3K), various other medical devices that were not covered by Medicare ($$) , high prescription costs beyond Part D coverage for DW ($8K), and Medigap premium costs ~$5K). I know I missed a few things.
Wow, ouch! Big medical expenses not so good!
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Old 10-16-2017, 11:10 PM   #12
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Wow, ouch! Big medical expenses not so good!
It's been quite a year. We don't want a repeat performance.
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Old 10-17-2017, 03:38 AM   #13
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To add on to answering the OP's question, as can be seen somewhat, the answer is far from simple, it greatly depends on each person's taxable situation. First, to even be a question, their must be earned income from some sort of job. Second, assuming the 1st condition is met, the taxable income level for the year has to exceed what you would expect in an average year in retirement, otherwise, a Roth is better.

A Roth can be better even if it would be somewhat higher than an average year, if you don't already have one, as it can help reduce taxes during an unusually high expense year in retirement, such as a huge spike in medical bills. You can do Roth conversions in unusually low expense years however, so this isn't a big issue if you make preparations.
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Old 10-17-2017, 04:02 AM   #14
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My motivation for contributing to tax-deferred retirement savings vehicles during my working years was always to gain the effect of the 30+ year interest free loan on the funds that would have been used to pay taxes normally.

Any "tax-bracket roulette", ie planning/hoping that retirement tax brackets would be lower than working tax-brackets, was always a minor consideration relative to the long-term interest free loan and compounding described above

-gauss
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Old 10-17-2017, 06:56 AM   #15
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I have been pulling RMD's for three years now, and with SS income, we are in the 25% bracket. If I had a real taxable pension to add to that, it would be worse.
I presume that some of the RMDs are spread around the lower tax brackets as well, so not all of it is taxed at 25%, whereas it is likely that the contributions were all subject to tax savings at your then marginal tax rate.
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Old 10-17-2017, 06:59 AM   #16
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Our CPA says it is better to have money and pay taxes on it, than not to have the money at all...

Quote:
Originally Posted by audreyh1 View Post
It's kind of one of those "good" problems to have, though, right? And would a pension on top really be "worse"?

At least not all your income is taxed at 25%
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Old 10-17-2017, 07:34 AM   #17
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Originally Posted by DanP View Post
For someone in ER in their early 50's, living off taxable investments:

If one had zero job income, is there any reason not to max a T-IRA anyway?

Isn't the concept that being able to defer dividends and gains tax for many years worth it right then and there?

I don't quite understand RMDs yet but see how that plays a role still how could it possibly trump T-IRA contributions in an ER scenario?
There is never an always when it comes to this kind of decision.

If your tax rate is going to be higher in retirement, you don't want to defer taxes. Also realize that money withdrawn from a tIRA is taxed at regular income rate, while qualified dividends and LTCGs get a favorable rate. And don't forget that more income in retirement can push more SS benefits into being taxed, so even if the marginal rate is the same you probably don't want to defer.

I suggest you do a sample return now, and estimate what your situation will be in retirement and do a sample return for that too. Compare the marginal rate to see what advantage deferring gives you now vs. what it will be taxed at with growth when you withdraw. That means you'll have to figure out your SS benefit and make an estimate for RMDs, and of course tax laws can change, but it'll at least give you an idea.

Many early retirees have a gap between the high income wage earning years and the retirement years when RMDs would hit along with SS, where our income and taxes are likely to be lowest. This gap is a good time to convert at least some of our tIRA to a Roth, trying to level out taxes over time. Rather than trying to defer taxes even longer, we seek to take taxes at a low rate to avoid having more income at a higher rate later.

As others have mentioned, it doesn't sound like you can contribute to a tIRA, so it's probably a moot point.
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Old 10-17-2017, 07:37 AM   #18
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Quote:
Originally Posted by lucky penny View Post
When I deferred compensation & put money into IRAs for many years, the rationale was that when I finally made the withdrawals, I'd be in a lower tax bracket.

So, this year I'll finally be making those RMDs & it won't surprise me if my tax bracket is higher.
Congratulations!! You ended up being more successful than you thought you would be when you deferred that income!
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Old 10-17-2017, 08:20 AM   #19
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I have considered doing a partial Roth conversion of my IRA. But doing so would increase my MAGI and make me ineligible for an ACA subsidy. Even though I am in only the 15% tax bracket, increasing my MAGI by $100 decreases by ACA subsidy by nearly $10. Taken together, that's nearly a 25% marginal (tax) rate. And that doesn't include if I itemize my deductions which include medical expenses where an increase in (M)AGI decreases my deductible medical expenses slightly and increases my taxable income slightly, increasing my taxes slightly.


I saw the effect of being able to reclassify a state property tax rebate as a negative itemized deduction instead of as income and how that by itself lowered by income tax bill, mostly because of the ACA subsidy increase but partly because of the itemized medical expense increase.
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Old 10-17-2017, 12:09 PM   #20
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Our CPA says it is better to have money and pay taxes on it, than not to have the money at all...
I hope you paid a lot of money for that pearl of wisdom.

like others have said, the real advantage of the tax-deferred account are the ability to make money on money you would not have had in the first place (i.e. that portion of your IRA that would have gone immediately to the tax man) and the tax-free accumulation of your earnings.

However, a stash of after tax funds is nice, because you can keep your taxable income low for a few years, maybe get some ACA love, and it lowers your tax hit on SS if you are taking it.
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