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Question about 401k
Old 12-08-2014, 09:21 AM   #1
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Question about 401k

Someone once wrote that I would want to draw down my 401k between 59.5 and 70 so Social Security is taxed as little as possible. I plan to do that. My question is how is Social Security taxed as little as possible by taking 401k between 59.5 and 70? I am just trying to understand and I am a little lost.
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Old 12-08-2014, 09:40 AM   #2
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The only thing I can think of is that it has something to do with RMDs that kick in at 70? If you draw down your 401k starting at 59.5, you'll reduce its overall value so that when you have to start taking RMDs, they're smaller?
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Old 12-08-2014, 09:41 AM   #3
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I assume it has to do with required minimum withdrawals. If you wait until you are 70, you may have a large IRA balance and be in a higher tax bracket.

If you take it at 59.5, and are not working, most people have limited income. You can adjust the withdrawals to keep under any income limits. After 70, the government tell you how much you must withdrawal. And you can roll some of it into a Roth if you want.

If you are making a large (or small) income regardless, it probably doesn't matter.
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Old 12-08-2014, 09:46 AM   #4
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In general, if your other income (wages, interest, dividends, etc) plus one-half of your SS benefits exceed $32K (assuming MFJ) then up to 85% of your SS benefits would be subject to income tax.

At age 70.5, your required to begin the required minimum distributions (RMDs)from 401k's. This may drive your expected income to exceed the threshold and result in your SS benefits to be taxed at your marginal tax rates. And for many, the RMDs may also push them into higher marginal rates at the same time (say you were in the 15% bracket before RMDs kicked in, but they now push you into the 25% marginal bracket)

Of course, all this is dependent on your particular numbers an circumstances. The recommendation is not really about if your SS will be taxed, but a way of planning your 401k/IRA withdrawal strategies to potentially smooth out the tax hits that may happen once RMDs kick in
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Old 12-08-2014, 09:56 AM   #5
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There are algorithms in the i-orp tool that are designed to optimize drawdown. You might consider seeing what it recommends in your case.
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Old 12-08-2014, 10:03 AM   #6
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Once you decide to take ss, up to 85% of it gets taxed once you reach a certain income level during retirement. I don't know what that figure is for 2015, but you can look it up. The theory is to use 401K money as income before you begin SS and then keep you 401K withdrawal and other income below the SS tax level.


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Old 12-08-2014, 10:35 AM   #7
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You have good responses here, it is all about taxation of SS when RMD's come around.
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Old 12-09-2014, 03:08 AM   #8
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for someone delaying ss drawing down deferred money can be a gift from the tax gods.

you get to pull 22k tax free as a retired couple of money you wrote off at higher tax rates. in fact 42k of ira money runs about 1800 bucks in tax.

plus you can sell some taxable account stocks at zero to 5% tax for a very low taxable income.

it works better when you delay because usually ss plus the withdrawals gets you taxed . but heck if not by all means do it.

this is where old advice about leave deferred money last was wrong.

bypassing the ability to take low to almost no tax money while decreasing rmds's would be a shame to pass up each year and instead draw money from a taxable account where the bulk of taxes may already have been paid.


a good well planned tax structure using roth money , deferred ira money and over funded life insurance money can produce 100k plus income while delaying ss with very little tax.

but you need to structure this decades before for it to really work without paying all sorts of taxes to restructure things later.


had i knew i didn't know diddly about retirement tax planning decades ago i would have searched out a well skilled advisor , spent a few bucks and had far better tax structure than i ended up with.


this could also be an area you need to becareful with etf's and index funds. possibly decades of pent up taxes if you sell and change allocations down the road can bite you alot harder than had you paid some along the way. i am not saying it was not worth delaying the tax but the fact is your tax bill will be higher.

you may have extend the time frame out longer to make changes without jumping brackets or worse triggering the amt tax..

just keep it in mind..
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Old 12-09-2014, 05:56 AM   #9
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Quote:
Originally Posted by UnrealizedPotential View Post
Someone once wrote that I would want to draw down my 401k between 59.5 and 70 so Social Security is taxed as little as possible. I plan to do that. My question is how is Social Security taxed as little as possible by taking 401k between 59.5 and 70? I am just trying to understand and I am a little lost.
The reason SS is taxed as little as possible between ages 59.5 and 70 is that one is not even receiving SS between those ages, so it cannot be taxed at all. In other words, one delays getting receiving SS benefits until age 70. Since someone has to live off of something, they live off of their other money, namely their 401(k) withdrawals.

If one wants SS taxed as little as possible after age 70, then one should withdraw money only from Roth IRAs after age 70. That means one has to have large Roth IRAs to withdraw from. How does one do that? One does that by converting all their 401(k) and IRAs to Roth IRAs before age 70.

If one is converting all their 401(k) and IRAs to Roth IRAs before age 70, one may well ask, "How can I do that?" That's easy if one has a large taxable account that can be used to pay living expenses while not using the 401(k) and IRAs. The large taxable account can be used to pay the taxes on the Roth conversions, too.

So then, one can ask, "How does one get a large taxable account so that one can convert their large 401(k) and IRAs to Roth IRAs between ages 59.5 and 70 while delaying social security benefits until age 70?" The answer is easy: Have a great job and invest all your money while living well below your means from age 16 to age 59.5.
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Old 12-09-2014, 06:40 AM   #10
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The reason SS is taxed as little as possible between ages 59.5 and 70 is that one is not even receiving SS between those ages, so it cannot be taxed at all. In other words, one delays getting receiving SS benefits until age 70. Since someone has to live off of something, they live off of their other money, namely their 401(k) withdrawals.

If one wants SS taxed as little as possible after age 70, then one should withdraw money only from Roth IRAs after age 70. That means one has to have large Roth IRAs to withdraw from. How does one do that? One does that by converting all their 401(k) and IRAs to Roth IRAs before age 70.

If one is converting all their 401(k) and IRAs to Roth IRAs before age 70, one may well ask, "How can I do that?" That's easy if one has a large taxable account that can be used to pay living expenses while not using the 401(k) and IRAs. The large taxable account can be used to pay the taxes on the Roth conversions, too.

So then, one can ask, "How does one get a large taxable account so that one can convert their large 401(k) and IRAs to Roth IRAs between ages 59.5 and 70 while delaying social security benefits until age 70?" The answer is easy: Have a great job and invest all your money while living well below your means from age 16 to age 59.5.
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Old 12-09-2014, 06:50 AM   #11
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The reason SS is taxed as little as possible between ages 59.5 and 70 is that one is not even receiving SS between those ages, so it cannot be taxed at all. In other words, one delays getting receiving SS benefits until age 70. Since someone has to live off of something, they live off of their other money, namely their 401(k) withdrawals.

If one wants SS taxed as little as possible after age 70, then one should withdraw money only from Roth IRAs after age 70. That means one has to have large Roth IRAs to withdraw from. How does one do that? One does that by converting all their 401(k) and IRAs to Roth IRAs before age 70.

If one is converting all their 401(k) and IRAs to Roth IRAs before age 70, one may well ask, "How can I do that?" That's easy if one has a large taxable account that can be used to pay living expenses while not using the 401(k) and IRAs. The large taxable account can be used to pay the taxes on the Roth conversions, too.

So then, one can ask, "How does one get a large taxable account so that one can convert their large 401(k) and IRAs to Roth IRAs between ages 59.5 and 70 while delaying social security benefits until age 70?" The answer is easy: Have a great job and invest all your money while living well below your means from age 16 to age 59.5.

+1. Even I can understand this reply. Well done LOL!
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Old 12-09-2014, 06:51 AM   #12
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And the fact that the 85% of SS could be taxed at a marginal rate of 46.5%!!!
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Old 12-09-2014, 08:15 AM   #13
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The reason SS is taxed as little as possible between ages 59.5 and 70 is that one is not even receiving SS between those ages, so it cannot be taxed at all. In other words, one delays getting receiving SS benefits until age 70. Since someone has to live off of something, they live off of their other money, namely their 401(k) withdrawals.

If one wants SS taxed as little as possible after age 70, then one should withdraw money only from Roth IRAs after age 70. That means one has to have large Roth IRAs to withdraw from. How does one do that? One does that by converting all their 401(k) and IRAs to Roth IRAs before age 70.

If one is converting all their 401(k) and IRAs to Roth IRAs before age 70, one may well ask, "How can I do that?" That's easy if one has a large taxable account that can be used to pay living expenses while not using the 401(k) and IRAs. The large taxable account can be used to pay the taxes on the Roth conversions, too.

So then, one can ask, "How does one get a large taxable account so that one can convert their large 401(k) and IRAs to Roth IRAs between ages 59.5 and 70 while delaying social security benefits until age 70?" The answer is easy: Have a great job and invest all your money while living well below your means from age 16 to age 59.5.
The task before anyone in this scenario is to crunch numbers to see what tax ends up being 'less' in the long run. Converting that fat 401k and paying taxes on the conversion, cuz to get it to zero before 70 may mean that for some, you ain't no longer in the 0 or 15% tax bracket.

So that would need to be compared to the taxes paid against SS if you did none (or some) 401k to Roth conversion.
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Old 12-11-2014, 09:50 PM   #14
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^Right. It may not be wise to have the goal that SS is taxed as little as possible because it may cause something else to be outrageously taxed. But that wasn't the OP's question.
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Old 12-12-2014, 07:03 PM   #15
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Wow this thread has been very helpful. For a non-financial "brain" (lol), is i-orp a good way to determine if converting is right for my circumstances?

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Old 12-14-2014, 01:50 PM   #16
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I agree, if there are any further experiences that can help us in determining 401K, IRA withdrawals to minimize Social Security taxes, please respond. We all are looking to learn to make our best choices. That's what this web site is all about.
To all that have experienced this issue or are aware of it, please provide your thoughts. Thanks


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Old 12-14-2014, 02:06 PM   #17
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Originally Posted by UnrealizedPotential View Post
Someone once wrote that I would want to draw down my 401k between 59.5 and 70 so Social Security is taxed as little as possible. I plan to do that. My question is how is Social Security taxed as little as possible by taking 401k between 59.5 and 70? I am just trying to understand and I am a little lost.
As your income increases, the amount of SS that is taxable increases from 0% to 85%. From AARP:

Quote:
Generally speaking, that will depend on your total income. The higher your income, the more taxes you'll pay on your benefits.

Here's how it works: If you file as an individual and your combined income by this, Social Security means adjusted gross income and nontaxable interest plus one-half of your Social Security benefits is below $25,000, your benefits won't be taxed at all. If income is between $25,000 and $34,000, up to 50 percent of your benefits may be subject to tax. For income of more than $34,000, up to 85 percent of your benefits may be considered taxable income.

If you and your spouse file a joint return with a combined income below $32,000, your benefits are out of reach. For income between $32,000 and $44,000, up to 50 percent of benefits may be taxable, and up to 85 percent if combined income is more than $44,000.
Drawing down your 401k between 59.5 and 70 reduces the amount of required minimum withdrawals once you have turned 70.5 so it reduces your income and reduces the amout of SS that is taxable.

The other benefit is that if you plan it right you can stay in lower tax brackets and avoid getting bumped up into higher tax brackets.

I think a better strategy rather than withdrawals is to do Roth conversions if yo have other sources of funds and particularly if you have other sources of funds to both provide for your living expenses and pay the taxes on the roth conversions.
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Old 12-14-2014, 06:17 PM   #18
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Should one try to convert all or as much as possible while staying in the lower tax bracket? About 28% of my portfolio is in IRAs. The rest is all taxable. My social security at 70 will probably be around $34.5k and eventually husbands added will be around $50 total. RMD calculator had withdrawals going as high as $90Kish, so I can see that it is something I probably need to do.

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Old 12-14-2014, 06:32 PM   #19
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Should one try to convert all or as much as possible while staying in the lower tax bracket? About 28% of my portfolio is in IRAs. The rest is all taxable. My social security at 70 will probably be around $34.5k and eventually husbands added will be around $50 total. RMD calculator had withdrawals going as high as $90Kish, so I can see that it is something I probably need to do.

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I think you should definitely try putting all your data into iORP and see what it recommends on how much to convert and when to do so.
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Old 12-14-2014, 06:42 PM   #20
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I will do that. Thanks, Alan. I did it earlier in the year and I THINK I understood it. The biggest question is that since 2015 will be our first year without earned income, and we are just now investing proceeds from sale of business, I really have no idea what my income from dividends and or interest will be. Hard to do projections until I get my allocation set with Vanguard.

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