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retirement cliff article
Old 05-19-2015, 08:49 PM   #1
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retirement cliff article

option C, I see know way to get that kind of tax savings, any body see what I am missing

The Retirement Tax Cliff -- Time to Rethink How You Tap Tax-Deferred Assets


The Retirement Tax Cliff -- Time to Rethink How You Tap Tax-Deferred Assets - TheStreet
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Old 05-19-2015, 09:09 PM   #2
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I think a lot of folks here have seen this issue well (years) before now, discussed it, and have acted on it.
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Old 05-19-2015, 09:17 PM   #3
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Originally Posted by perrytime View Post
option C, I see know way to get that kind of tax savings, any body see what I am missing

The Retirement Tax Cliff -- Time to Rethink How You Tap Tax-Deferred Assets


The Retirement Tax Cliff -- Time to Rethink How You Tap Tax-Deferred Assets - TheStreet
Not unless they are projecting some really large gains within the IRA before it is withdrawn. Would be nice if they showed the math behind this. Still, the partial Roth conversion is a well known strategy here.

7.5% withdrawal rate from age 60? Yikes!
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Old 05-20-2015, 06:04 AM   #4
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I think a lot of folks here have seen this issue well (years) before now, discussed it, and have acted on it.
+1 we have had many discussions on the tax torpedo and using roth conversions to avoid or minimize it.
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Old 05-20-2015, 10:19 AM   #5
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Not unless they are projecting some really large gains within the IRA before it is withdrawn. Would be nice if they showed the math behind this. Still, the partial Roth conversion is a well known strategy here.

7.5% withdrawal rate from age 60? Yikes!

I think these articles are for people who are close to the next tax bracket... since most articles talk about how the vast majority of people do not have enough saved to retire, this does not affect them...
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Old 05-20-2015, 11:06 AM   #6
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I've certainly been thinking a lot about the tax torpedo as I approach ER at 55 later this year. With pension and investment returns I'll be right around the top of the 15% bracket, so any Roth conversions would be subject to 25% tax (as well as the 30% effective marginal rate on my dividends and cap gains). Also more than half of my investable assets are in tIRA/401K so even if I do Roth conversions to the top of the 25% bracket every year between 55 and 70 I'll only reduce my RMDs by about 1/3rd.

Balance that against the 28% bracket I'll hit if I defer SS until 70 and hit RMDs at the same time. Based on the tax hit I probably "should" take SS early, but it's the only COLA'd annuity I'll get so I wish I could delay till 70 and max it out. Unfortunately no free lunch!
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Old 05-20-2015, 11:47 AM   #7
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Can you delay your pension? Mine is delayed and growing each year and leaves headroom for Roth conversions since we have taxable account money to live on. Alternatively, if your employer allows penalty free 401k withdrawals, that would give you more headroom as well.
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Old 05-20-2015, 01:47 PM   #8
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Can you delay your pension? Mine is delayed and growing each year and leaves headroom for Roth conversions since we have taxable account money to live on. Alternatively, if your employer allows penalty free 401k withdrawals, that would give you more headroom as well.
Yes and that's another variable. Comparing with the price of immediate annuities the value of my pension grows by about 5.5% the first year but the rate of increase slowly drops from there - down to 5%/yr by 60 and 4%/yr thereafter until 65. This isn't a high enough growth rate (particularly for a non-COLA'd pension) to make it that beneficial to delay. Breakeven is somewhere in my mid-'70s - even without inflation - and beyond my life expectancy if inflation goes up past 3%. The taxation issue complicates this, and right now it does look like there is a small marginal benefit to delaying the pension for 2-3 years but not any more than that.

That's what I mean about no free lunch.
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Old 05-20-2015, 06:30 PM   #9
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mild case of retirement time bomb... ala Ed Slot
one can easily go well above the 15% bracket.

The future changes make rework these cases for the worst.
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Old 05-20-2015, 06:37 PM   #10
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I don't follow this part:

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C) Applying the same rules, except that the couple takes the extra tax-deferred withdrawals and converts them into a Roth IRA instead of reinvesting them in the taxable account.

In scenario B, by making early tax-deferred account withdrawals, the couple took less in RMDs later and saved $52,000 in taxes. With the Roth conversions used in strategy C, the couple saved $240,000 in taxes and ended up with more than $330,000 in additional wealth.

The hypothetical couple drew the same $75,000 income in all three instances but saw a drastically different impact to its remaining wealth, especially when utilizing the annual Roth IRA conversions.
How can you take early or "extra" withdrawals from a 401k account for instance and convert to Roth? If you're retired at that point, don't you need earned income to contribute to a Roth?

Or are you paying taxes early by withdrawing before RMD?
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Old 05-20-2015, 09:40 PM   #11
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I don't follow this part:



How can you take early or "extra" withdrawals from a 401k account for instance and convert to Roth? If you're retired at that point, don't you need earned income to contribute to a Roth?

Or are you paying taxes early by withdrawing before RMD?

You are not contributing extra money to a ROTH, you are converting money from one kind of account to another.... and paying taxes...
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Old 05-21-2015, 07:00 AM   #12
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You are not contributing extra money to a ROTH, you are converting money from one kind of account to another.... and paying taxes...
and if done under the right conditions... the marginal tax rate on these conversions can be less than that at RMD time. This somewhat depends on the size of the RMD and the overall income rate at conversion time.
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Old 05-21-2015, 07:24 AM   #13
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Not unless they are projecting some really large gains within the IRA before it is withdrawn. Would be nice if they showed the math behind this. Still, the partial Roth conversion is a well known strategy here.

7.5% withdrawal rate from age 60? Yikes!
The author is probably also assuming that the couple both live a long, long, time to achieve those tax savings. And together with the assumption that the IRA has large gains, they've won the game and are rolling in dough in their golden years, so the big tax hit is a nice problem to have.
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