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Old 10-28-2009, 10:08 PM   #41
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Originally Posted by mathjak107 View Post

as long as the kids take their first witdrawl in the same year the owner dies they can get a lifetime of tax free withdrawls... imagine decades of growth compounding tax free . if they blow it and miss the first year then they have to disolve the roth within 5 years... that kills the entire purpose in my eyes. sooooo make sure your heirs know this ....
mj107........agree w/ you about the great Roth advantage for heirs esp. young ones and the need to make sure they know the rules. Your rule would work but I believe the actual rule gives them an extra yr to take the first RMD
https://personal.vanguard.com/us/acc...sNSContent.jsp
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Old 10-29-2009, 12:37 AM   #42
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I think whether you start raising cash and stop or limit your contributions to your tax deferred savings in the last few years before retirement really depends on how you have your nest egg allocated. DW and I sat down and decided we were close enough to jump in a year or two but we would prefer to have more $ outside of retirement before retiring so we wouldn't have to touch the retirement funds until after 59.5. So we decided to cut back on the defined contributions to raise cash or short term investments outside of retirement. That's what we are doing anyway.
This is exactly what we decided in the end (thanks, everyone, for all of the thought-provoking discussion!) We will be 54/53 when we ER, so we need as much as possible outside the retirement funds at that point. I know that we will be able to do a 72t, but I'd rather defer that to later rather than sooner! So, we have switched our contribution to just the company match.
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Old 10-29-2009, 02:55 AM   #43
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mj107........agree w/ you about the great Roth advantage for heirs esp. young ones and the need to make sure they know the rules. Your rule would work but I believe the actual rule gives them an extra yr to take the first RMD
https://personal.vanguard.com/us/acc...sNSContent.jsp
you are correct , i didnt realize that it was changed.. i did notice one other thing i wasnt aware of, the roth must be in existance 5 years for the heirs not to be taxed on some of it as the same 5 year rule applys to them as to you. they can wait until the five year period and then take their 1st distribution if the roth they inheirited isnt mature yet.
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Old 10-29-2009, 07:48 AM   #44
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. i did notice one other thing i wasnt aware of, the roth must be in existance 5 years for the heirs not to be taxed on some of it as the same 5 year rule applys to them as to you. they can wait until the five year period and then take their 1st distribution if the roth they inheirited isnt mature yet.
mj107........I agree w/ your first sentence. Not sure I agree w/ your second one about delaying..........do you have a link on that? I thought the penalty for delaying was pretty fierce.......like 50%??

Here's a quote from that VG link: I think the key words are
PRE-tax contributions and EARNINGS
Since the Roth is POST-tax contributions, my impression is that (at least for the original owner), contributions come out first and are tax and penalty free at any time. Rollovers and EARNINGS are a different matter. Not sure if the rules are different for heirs. I would think that if the Roth was not 5 yrs old, since RMDs are only a small % of the Roth, that the original contribution would be large enough to cover the RMD w/o having to reach into earnings.

"Tax issues
Generally, distributions of pre-tax contributions and earnings from inherited IRAs are tax reportable distributions included in your ordinary income. However, distributions of earnings from a Roth IRA may generally be tax-free if the original account owner had held the account for at least five years. If you're over age 59½ when you withdraw from an inherited Roth IRA and the five-year condition is met, your withdrawals will be tax- and penalty-free."
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Old 10-29-2009, 08:50 AM   #45
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It says if the inherited roth isnt at least 5 years hold you can hold off taking distributions until it is. i guess thats to cover death bed conversions


As a rule, you don't pay tax on money you inherit; but there are important exceptions, such as inheriting a traditional IRA.
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Old 10-29-2009, 09:12 AM   #46
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It says if the inherited roth isnt at least 5 years hold you can hold off taking distributions until it is. i guess thats to cover death bed conversions


As a rule, you don't pay tax on money you inherit; but there are important exceptions, such as inheriting a traditional IRA.
Here's the quote from that article: I might be wrong but I think you might be mixing 2 concepts.....the lifetime RMD and the 5 yr rule. My impression is that if you want the RMD to last for the beneficiary's lifetime, the RMD has to be taken by the end of the yr following owner's death. If you don't, then you have to take all of the Roth out within 5 yrs. Either/or but not both. Generally, I would think lifetime RMDs would not create an issue of being taxable since withdrawal of contributions are always tax free, they are a small % of total value, and first withdrawals are considered contributions but I don't think you can wait 5 yrs to take them if you want the Roth to last for a long time.

"Inherited Roth IRA
The Roth IRA is funded with after-tax dollars, and those dollars are never taxed again, no matter when they're distributed. If you inherit a Roth IRA that is at least 5 years old, all distributions -- including income and capital appreciation -- go to you tax-free.

The bad news: The very first Roth IRA account was born in 1998, and will not meet the five-year holding period until Jan. 1, 2003.

The good news: You don't have to take the money the minute you inherit it. There's a "five-year rule" that says you don't have to take distributions from an inherited Roth IRA until Dec. 31 of the fifth year following the year of death. That's more than enough time to meet the five-year holding period, and take your distributions tax-free.

For other distribution possibilities, read IRS Publication 590, Individual Retirement Arrangements (IRAs)."
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Old 10-29-2009, 09:36 AM   #47
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ill research later but i believe the exception to withdawing at the end of the following year after death for lifetime withdrawls is if the roth isnt at least 5 years old.

i know i read it somewhere, but im no expert on this stuff thats for sure
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Old 10-30-2009, 03:50 AM   #48
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looks like the answere is if you inherit a roth that hasnt been in existance yet for 5 years then you have to stretch the withdrawls out so all you take is principal first . after 5 years earnings can be withdrawn...

the trap is you must find out by hook or by crook how old the roth is when you inherit it. unless you ask the custodian the issue probley wont come up and you may take distributions that end up being taxable unknowingly .
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Old 10-30-2009, 09:27 AM   #49
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Sounded like you were going to advise your heirs to do the lifetime RMD
anyways so just add the 5 yr rule to the many other things you tell them
...........I suppose it will have to be in writing since, if they're anything like my DD, they won't be so interested now in gory details and probably won't remember either.
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Old 10-30-2009, 09:49 AM   #50
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Same here, we are going to staple very specific roth instructions to the packet with our wills and other paperwork... no chance any of our kids will remember this stuff
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Old 10-30-2009, 07:47 PM   #51
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mj107.......new info from fairmark.com pro.

I knew that if you had a Roth consisting of just contributions and earnings (no conversions) you could withdraw the RMDs after the owner's death and not pay a penalty because the RMD is about 4% at age 70 and there is no way you could withdraw enough to start withdrawing earnings (contributions come out first) if the Roth was not yet 5 yrs old and you were only taking RMDs.

I was worried that if you started the first Roth w/ a conversion and the death of owner occurred shortly thereafter, the 5 yr clock for Roth conversion would cause a penalty on RMDs because they were considered to be from the conversion. However, this link suggests that
the 5 yr clock for Roth conversions is cancelled by the owner's death...
(for the conversion part only). The clock continues for earnings. However if the beneficiary is only withdrawing RMDs, again there is no way to withdraw enough to start withdrawing earnings (the conversion amount comes out first) within the first 5 yrs. Hopefully this makes sense......it's a bit complex.

Fairmark Forum :: Retirement Savings and Benefits :: Inherited Roth.....RMDs & 10% penalty
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Old 10-31-2009, 03:19 AM   #52
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thats how i interpret it too. thats why its important the kids know to check how old the roth is.... if they elect lifetime payments the payments would probley be small enough so no earnings were taken out on a roth less then 5 years old . however if they went for the 5 year withdrawl so much would come out they are likley to pull earnings and get taxed
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Old 11-01-2009, 02:53 PM   #53
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i started reading ed slotts book. some pretty cool ideas in the book.

if you have a tradional ira thats will be taxable and faced with rmd's what you can do is instead of leaving your wife as beneficiary leave your kids as beneficiary... lets say you have a tira worth 500k... leave your kids as beneficiary instead of your wife... with some of the money from the ira buy a life insurance policy on yourself for 500k... at your death your wife gets to keep 500k tax free in life insurance, the kids get to take withdrawls over their lifetimes of the ira money allowing it to grow and producing much smaller taxable amounts over their life time then your wifes would have been.



or take some of the rmd's and leverage that money big time by buying a life insurance policy on yourself with the kids as owners. give them a gift of the money each year to pay the policy... at your death they will get a tax free pay off far above what the policy probly cost and it passes outside your estate.
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Old 11-01-2009, 07:59 PM   #54
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It's been a while since I read his books so I don't remember any of the details. I wonder how the math works out if you don't qualify for the very best rates due to medical reasons. I assume this is whole life since you might live forever and term rates would become absurdly high or perhaps you couldn't keep the term forever?
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Old 11-02-2009, 04:41 AM   #55
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im sure not being healthy would raise the rates but in the book he talked about an elderly couple who both were very ill and it paid for both of them to take life insurance and companies did pick them up....

all things being equal the smart thing is set this up while your healthy
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Old 11-02-2009, 10:19 AM   #56
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I think the implication is that you would set up the term life policy while still young enough to qualify (60ish). You should be able to get a 20 year term life policy at that age without breaking the bank, unless you are already very ill. If you outlive it, you'd probably only need a shorter term but much more expensive policy after that. No matter what, it's pretty much guaranteed to be cheaper than the taxes.

Ed Slott's ideas will work for the majority of people who need to try to minimize estate and inheritence taxes, but nothing works for everybody. I've been reading his books over time, and plan to implement some of his ideas. It's on the to-do list (item #673).
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Old 11-03-2009, 06:38 AM   #57
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so the question is does conventional planning still apply with a roth conversion.. normally we keep our biggest growing asset (hopefully ) our stocks and stock funds in our taxable account where they get special capital gains treatment and what ever is left the kids get a stepped up basis on and get tax free... our income producing stuff normally goes in the tradional ira's and 401k...

but now im thinking maybe thats wrong .. maybe the biggest gaining stuff should be in the roth where there is no chance id have to sell it and pay a tax or pay taxes on distributions every year and let that run totaly tax free..

im not sure the compounding on the income stuff in the roth would make the price of conversion the best deal.... its like the tax free compounding would be wasted on money that will be growing the least namely the bonds, bond funds , cd's etc by conventional planning rules.

im confused now.
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Old 11-03-2009, 09:01 AM   #58
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I guess I'm going to have to check out Ed Slott's book for a second look.

Harley.......like many things financial, the devil is in the spreadsheet. Your post made me realize that I must have misplaced/lost a letter from USAA
concerning my 10 yr level term (longest they would give me). For 100K,
premiums are $754/yr for 10 yrs then they jump to ? I forget exactly but in the range of 13-31K/yr. (I found it: 34K+ in yr 11) I'm not sure how that works out if you live a long time. That's why I was thinking the strategy might have been for whole life. I don't know if term goes forever but it would be a shame to embark on this strategy (life insurance) and not go to completion bc the policy ended....either because it couldn't be renewed or because it was too expensive. Again, all in the numbers. As for myself, I know I have have a hard time parting with a big hunk of $$$ , at one time and even more if it was every yr and getting higher each time.........like buying an immediate annuity or redoing SS at 70.

MJ107.........I guess it depends whether you're a turtle or a hare; or a theorist or an experimentalist. I've been continually surprised looking at fund results......usually they go 1,5,10yr, life of fund..........esp. the 10 yr that covers the little bumps in the 2000 bubble and the more recent one.
Until recently the 10 yr returns on many were negative and even the more recent ones often didn't beat a CD. Yeah, I remember some long term equity return of 10% from some period I don't remember but you know that fine print about the past returns not being a guarantee of the future.
Maybe you want to go half and half as a hedge?
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Old 11-03-2009, 09:23 AM   #59
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YEP , the return on stocks has been dismal the last decade, thankfully im very well diversified and actually am still running a 9% long term average the last decade... in fact my mix of 25% total market index fund, 25% long term treasurys, 25% cash and 25% gold did rather well. i was up last year about 5% as tresuries took off and were up 28% . that plus the gold excceded the stock loses...

but overall that mix did well for decades averaging over 9% now for decades ... never a barn burner in the up markets but makes it all up in the drops.

the key was rebalancing, all the while gold was doing nothing my rebalancing forced me to buy more and more over the decades. finally when gold had its day in the sun and was back on the radar as an investment it worked out great
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Old 11-03-2009, 10:56 AM   #60
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MJ107....sounds like you have great discipline. I did the gold thing for awhile but it seems like it went to sleep or maybe even declined for a long time so I stopped. Congrats to you for staying the course. Is that a heavier than conventional weighting?
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