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Mistake made
Old 04-26-2016, 07:09 AM   #1
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Mistake made

At the age of 62 I feel that I have made a mistake when it comes to saving money in different accounts... now planning for retirement and looking at all the tax stuff, I realized that we should have put more money into a taxable account.... Most of our money is in a tax deferred account... In which we could be hit with high taxes when we hit into our 70's.
I am now doing calculators on how much to take out of the tax deferred account so we do not get hit when the RMD hits us.
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Old 04-26-2016, 07:19 AM   #2
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Are you sure it's really a mistake?

Most of our savings are in tax deferred accounts as well, but in my case I think that will work out for the best. We've stayed in the 15% bracket the first 10 years of retirement vs the 28% and occasional 33% when we were working. At some point after RMDs start we will creep into the 25% bracket, not a big problem as I see it.
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Old 04-26-2016, 07:29 AM   #3
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I have been reading some articles which they were talking on the advantage of have a taxable account or roth to keep taxes down... I am just thankful that we did save for retirement. I think that we did good considering we had to raise three sons all with disabilities. Thanks for your response....... I am just trying to stay calm while looking towards husband retiring in Feb.
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Old 04-26-2016, 07:39 AM   #4
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Originally Posted by REWahoo View Post
Are you sure it's really a mistake?

Most of our savings are in tax deferred accounts as well, but in my case I think that will work out for the best. We've stayed in the 15% bracket the first 10 years of retirement vs the 28% and occasional 33% when we were working. At some point after RMDs start we will creep into the 25% bracket, not a big problem as I see it.
+1

While I really wish we weren't so lopsided toward tax-deferred accounts (and plan to rectify that via Roth conversions in the 13-14 years before 70), the numbers were and are pretty compelling. Our retirement tax rates are going to be significantly less than our marginal rates while working--as long as we don't leave too much sitting in T-IRAs for when DW becomes a solo taxpayer in, hopefully (!), her late 80s or 90s,
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Old 04-26-2016, 07:39 AM   #5
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I am just trying to stay calm while looking towards husband retiring in Feb.
From your posts on the forum about your situation I'd say you are in really good shape financially and need to find something else to worry about.
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Old 04-26-2016, 07:41 AM   #6
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Are you sure it's really a mistake?

Most of our savings are in tax deferred accounts as well, but in my case I think that will work out for the best. We've stayed in the 15% bracket the first 10 years of retirement vs the 28% and occasional 33% when we were working. At some point after RMDs start we will creep into the 25% bracket, not a big problem as I see it.

But I think that is the point... putting deferred money aside at the high tax rates is what should be done... however, that is not what was preached when we were young... it was always 'put as much money into your 401(k) as you can'.... heck, that still seems to be the saying of most FAs today...

I have not looked, but I bet anything that I was putting money that would have been taxed at 15% (and maybe less) into these accounts.. I did pay 28% when I converted them to a ROTH when it first came out.... not sure in the end if I paid less or more taxes than I needed...
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Old 04-26-2016, 07:51 AM   #7
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At the age of 62 I feel that I have made a mistake when it comes to saving money in different accounts... now planning for retirement and looking at all the tax stuff, I realized that we should have put more money into a taxable account.... Most of our money is in a tax deferred account... In which we could be hit with high taxes when we hit into our 70's.
I am now doing calculators on how much to take out of the tax deferred account so we do not get hit when the RMD hits us.
I feel exactly as you do.....and there or other areas of my life that I would modify if I had the chance, but all-in-all I am very glad to have any savings at all. I guess the incentive of tax deferral was effective since I seem to have spent most of our taxable savings on our children's tuition and other things.

I think the fear of RMD's is somewhat overblown for many people. We expect to be in approximately the same bracket in retirement as when working. If your tax bracket is dramatically different you may pay a bit more in taxes, but only on the margin.

The RMD amount is pretty close to 4% at 70.5 so it's probably in the ballpark of what many will be withdrawing anyway. They can only make you pay taxes on the distribution...you aren't required to spend the money!

Finally, I plan to gradually move some assets over to taxable or Roth accounts to reduce RMD's. This probably won't help tax-wise since I expect to be in the same tax bracket, but it's another form of diversification so If I have a big expense, the tax consequences are minimal.
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Old 04-26-2016, 07:57 AM   #8
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95 percent of our nest egg is within an IRA. Not worrying one bit about the tax bite on the RMDs to come.

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...

They can only make you pay taxes on the distribution...you aren't required to spend the money!
....
+1. We'll park most of it somewhere after the taxes are paid on it.
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Old 04-26-2016, 08:02 AM   #9
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At the age of 62 I feel that I have made a mistake when it comes to saving money in different accounts... now planning for retirement and looking at all the tax stuff, I realized that we should have put more money into a taxable account.... Most of our money is in a tax deferred account... In which we could be hit with high taxes when we hit into our 70's.
I am now doing calculators on how much to take out of the tax deferred account so we do not get hit when the RMD hits us.
A nice problem to have IMO, because if you are hit with high taxes when you're in your 70s, you will have won the game (i.e., won't need to worry about running out of money) because your investments must have performed well enough to put you in that high bracket.
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Old 04-26-2016, 08:04 AM   #10
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A nice problem to have IMO, because if you are hit with high taxes when you're in your 70s, you will have won the game (i.e., won't need to worry about running out of money) because your investments must have performed well enough to put you in that high bracket.
+1 Hindsight is 20-20, but no use wringing your hands over not winning by more points.
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Old 04-26-2016, 08:07 AM   #11
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I am in a similar situation, but the reality is that had I not taken advantage of the tax deferred retirement vehicles along the way, each year the tax man would have had his bite, and the amount of money I would have would be far less.

Sure, I'd rather have "X" amount in after tax investments, rather than "X" amount in IRAs, however, had I not used the tax deferred compounding magic of my IRA and 401k, "X" would be a much, MUCH, smaller number.
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Old 04-26-2016, 08:13 AM   #12
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At the age of 62 I feel that I have made a mistake when it comes to saving money in different accounts... I am now doing calculators on how much to take out of the tax deferred account so we do not get hit when the RMD hits us.
Don't know which calculators you have or their capabilities. Optimal Retirement Calculator and Retirement Decision Support System will provide a summary by year of your tax payments and what tax brackets they are taken from. It will also recommend how much from each account (taxable, tax deferred, Roth) to use each year to minimize taxes over your life time. Lastly, it has an option to allow it to make suggestions on how much of a traditional IRA to convert to Roth IRA each year to also minimize taxes over time. Other programs may do same but this is the one I am familiar with and mentioned often on this board.
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Old 04-26-2016, 08:14 AM   #13
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Most of our money is in a tax deferred account... In which we could be hit with high taxes when we hit into our 70's.
I am now doing calculators on how much to take out of the tax deferred account so we do not get hit when the RMD hits us.
We saved more in after tax $. It was about 55/44/1 (after tax/tax deferred/roth). We are looking at the RMD issue and it still looks like it could be an issue even if we convert up to the top of the 15% bracket. I retired last year and we both had some earnings which made the conversion rather moderate. This year the plan is to convert to the to the top of 15%. Next year is a question... is it better to convert below 15% marginal rate, to just below the ACA subsidy cliff, or where.
Now we have moved more bond'ish investments into the IRAs. Figure slower growth will lower the the RMD time bomb.
Of course the taxes on roth conversion are paid with after tax $.
Having after tax $ invested in growth and dividend stocks and ETFs make for lower taxes if one stays below the top of the 15% bracket.
Couple questions:
Will you need to pull out $ from your tax deferred to live on before 70?
How do you have your investments spread among account types?
If you don't need the tax deferred $ until you are 70, how much can you convert to roths?

I look at it like ... I know I can't make it optimum at the 15% bracket, but everything I do convert is taking of the highest marginal bracket at RMD time.
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Old 04-26-2016, 08:26 AM   #14
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I agree. I am working with our tax person so see how much I can pull out of the IRA and convert it to Roth or taxable account. I would like to stay within the 15%. The only time we really need to pull from our IRA is the first two years of our retirement but when the pension and ssi kick in, we really will not need the money. I am working the calculators now.
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Old 04-26-2016, 08:41 AM   #15
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I agree. I am working with our tax person so see how much I can pull out of the IRA and convert it to Roth or taxable account. I would like to stay within the 15%. The only time we really need to pull from our IRA is the first two years of our retirement but when the pension and ssi kick in, we really will not need the money. I am working the calculators now.
When you reach age 70 you'll have to withdraw even if you don't need, or even want, that money. Moving from tIRA to Roth now is the only way to minimize that and would be one reason to go above the 15% limit.
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Old 04-26-2016, 08:53 AM   #16
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Why not start taking the equivalent of RMD's immediately after retirement? Aim for the same taxable income now until death.
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Old 04-26-2016, 08:55 AM   #17
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I think the benefit of having money in different accounts gives you options when looking to withdraw money in retirement.

For example....say a retiree has $3million in accounts with $1 million in taxable, $1 million in tax deferred (Trad IRA) , and $1million in in a tax free account -Roth IRA. And within each of these accounts there is a mix of equity funds and bond funds (obviously muni bonds in taxable and taxable bonds in the Trad and Roth Ira).

Now a retiree can withdraw from an account which would least disrupt one's asset allocation AND minimize taxes. PErhaps do a little tax loss harvesting in taxable. MAybe withdraw from a Roth for a big purchase such as a new car to avoid being thrust into a higher tax bracket or lose an ACA tax subsidy.

It's all about having choices available to meet your expenses and minimize taxes at the same time. For myself I am trying to do as much as I can in Roth conversions to build up my ROTH accounts if future withdrawals from these accounts works from a tax perspective.
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Old 04-26-2016, 09:20 AM   #18
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Are you sure it's really a mistake?

Most of our savings are in tax deferred accounts as well, but in my case I think that will work out for the best. We've stayed in the 15% bracket the first 10 years of retirement vs the 28% and occasional 33% when we were working. At some point after RMDs start we will creep into the 25% bracket, not a big problem as I see it.
+2 I think many of us who are retiring now are more likely to be lopsided because Roths and HSAs were not available for most of our working lives. We had some taxable for which I am thankful.

Some people lament withdrawing from tax-deferred accounts because they then have to pay taxes and have an unrealistic mindset that they shouldn't have to pay taxes in retirement. The way I figure it I avoided paying 28% or 33% in federal tax when those earnings were deferred and on the Roth conversions I have done the past couple years I have paid about 10% in tax because a portion of the Roth conversion was 0% tax because it was offset by deductions and exemptions, some was at 10% and the remainder at 15%.

So I figure that I am ahead by 18-23% having deferred. So I don't see that you have made a mistake at all.

Do yourself a favor and do a sample tax return (in TurboTax or using Taxcaster) to see what the average tax rate you are paying in retirement on your withdrawals and then compare that to your marginal tax rate while you were working and I think you will feel a lot better.
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Old 04-26-2016, 09:23 AM   #19
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I have not looked, but I bet anything that I was putting money that would have been taxed at 15% (and maybe less) into these accounts.. I did pay 28% when I converted them to a ROTH when it first came out.... not sure in the end if I paid less or more taxes than I needed...
I thought that may have been my case too, but when I checked tax rates from when I started my 401k that wasn't true.

https://www.scribd.com/doc/190499803...tory-1862-2013 shows historical tax brackets. There were a lot more tax brackets back before 1987, if that's when you started, and the rates in general were higher, especially if you didn't have any tax shelters.

I started contributing to a 401K in 1984 or 1985. Remember that the deferred money is taking off the marginal (top), not your effective (average) tax rate. If it was a partial year of full time work in 1984 I was on the 23/26% border, then 30% the next year, plus I was only deferring up to my company match, so I feel good about the early deferrals. If you want to convince yourself you can check your SS wages against that table and see what you really deferred at.

Nowadays, with the bigger 15% bracket, I'm advising my son to only defer up to the company match, and contribute to a Roth after that.

28% might be a high conversion rate compared to partial conversions at 15%, but if the investments have done well in a Roth, you aren't paying more taxes on them. Also probably not all of it was converted at 28% unless you were already in that bracket. I remember when someone said they did a full conversion in the year when you could defer paying the taxes by splitting it over the next two years. They did the math and figured they came out better by paying the higher taxes and having the nice growth that followed tax free, rather than having most of the money grow in the tIRA and pay taxes on those gains, even though it would've been a lower rate.

My motto is that if you made a mistake in the past, and it's too late to fix, learn from it, make the best decisions moving forward, and move on. No sense beating yourself up. If someone today is maxing out a 401K in the 15% bracket, the best decision moving on may be to reduce contributions to the company match, put the rest in a Roth and possibly a taxable account, and consider converting some of that 401K to a Roth if that's possible.
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Old 04-26-2016, 09:25 AM   #20
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I agree it's not a mistake. But I always put some in Roth through backdoor at work and through no deductible IRAs. But for most people there is still a large in chunk in IRA. I will paying very low tax rate, much lower then when I was contributing.


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