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Retiring Fully in 2016 at 60 Finally
Old 09-24-2015, 05:22 PM   #1
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Retiring Fully in 2016 at 60 Finally

Hello everyone, I have been reading almost every section for several years and realize there are in fact many highly educated and interesting people here with lots of experence and knowledge.
I would like some help as I am finally getting close to fully retired. My situation is that I owned a small one man business for the last 30 years and to save for retirement I got caught in the DB plan that in the later years I had to fund an extreme amount of money even more than I made in the business some years. At this point I have 1.6 million in an IRA and need to reduce that amount. The problem is how to pull out money every year without paying the high taxes. Even at 100,000.00 per year it will take me 16 plus years to pull this out. Count in SS and my taxes go even higher.
I have tried to think of everyway possible and I have talked to my accountant but It looks like I am just screwed unless I want to pay large taxes in retirement.
Any help from your experience would be indeed helpful.
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Old 09-24-2015, 05:33 PM   #2
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What you are worried is a common problem referred to as the tax torpedo. Many of us defer pensions and SS so we can withdraw tax-deferred funds at low tax rates (via Roth conversions).

Are you single or married? You don't have to pull it out in 16 years, it is just that after you turn 70 you must pull it out (aka RMDs).

Check out taxcaster. If you are single, you can have income of up to ~$47,750 and still be in the 15% tax bracket and your total tax would be $5,160, or ~10.8% of the $47,750.... which is probably a lot less than the tax you avoided paying when you deferred the income so you are probably still far ahead compared to not deferring the income. (Assumes no other income and standard deduction). It would be double if you are married. YMMV.
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Old 09-24-2015, 05:40 PM   #3
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Thank pb4uski I will check out Taxcaster. I am married but will also have a high dividend income from a taxable account. I though about buying a small cheap farm but there are not that many deductions. I think I will still be in the 25% tax bracket which means over time the 1.6 will be reduced by $400,000.00 maybe less.

I guess I will just live like a little king and die like a taxed man.
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Old 09-24-2015, 05:42 PM   #4
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you have to pay taxes on it at some point - tanstaafl
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Old 09-24-2015, 05:56 PM   #5
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Thank pb4uski I will check out Taxcaster. I am married but will also have a high dividend income from a taxable account. I though about buying a small cheap farm but there are not that many deductions. I think I will still be in the 25% tax bracket which means over time the 1.6 will be reduced by $400,000.00 maybe less.

I guess I will just live like a little king and die like a taxed man.
So for married joint for 2015 the top of the 15% tax bracket is $74,900. Add the MFJ standard deduction and exemptions and you could have up to $95,500 of income and still be in the 15% tax bracket. IF you limit your Roth conversions to stay in the 15% tax bracket then your dividend income from your taxable account will be 0% tax.

So for example, if your dividend income is $20,000 and you do $75,500 in withdrawals or Roth conversion from your IRA, your tax would only be $7,316 or less than 10% of the $75,500.

If you think that tax is too much, you need to recalibrate your thinking. I'm guessing that you avoided 25% or more when you deferred the income so you are saving 15%... pretty good IMO.

Also, don't confuse being in the 25% bracket with paying 25% tax... then 25% is only on the amount over the top of the 15% bracket.... so in the example above, if your withdrawals/conversions are $1,000 more ($76,500 instead of $75,500), then the added tax is $300 but the overall rate on the entire $76,500 withdrawal is still less than 10%.
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Old 09-24-2015, 06:05 PM   #6
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I forgot about the $74,500 limit. That should work out fine I can live off my dividend income of $80,000 in my taxable account and withdraw $95 or so from my IRA to convert into a Roth.

Thank for putting my mind at ease.
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Old 09-24-2015, 06:30 PM   #7
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With $80k of dividend income you would have $0 tax, but as you add in withdrawals/conversions your tax will go up but you can manage your overall tax to the amount you are comfortable with.

add $30k conversions tax is $3,118
add $50k conversions tax is $8,666
add $70k converisons tax is $14,666, etc.
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Old 09-27-2015, 12:05 PM   #8
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With $80k of dividend income you would have $0 tax,... .
What? Where did you get this? When I do my taxes, I certainly pay taxes on dividends.

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Old 09-27-2015, 12:13 PM   #9
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Dogman....


Not to be too critical, but you cannot have your cake and eat it too....

You were perfectly happy to not pay taxes for the last 30 years on that money and whatever high tax rate you had... so now that the gvmt wants their 'fair share', you balk at living up to their and your agreement....

I have zero problem with all the people who retire and then do conversion of their accounts at zero or 15% when the money went in at a higher rate... the gvmt knew this was a possibility and accepted it... smart people do it, not so smart just pay whatever....

I applaud you on trying to figure out the cheapest way to move forward, but you are not 'screwed'.... you saved a huge amount of tax money over the years... I would not call that being screwed.... BTW, I bet over 50% of the money in your account would not be there if you had been paying taxes all along....
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Old 09-27-2015, 12:16 PM   #10
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This is a nice problem to have. I would probably describe having lots of income in retirement and having a bigger than average tax bill as an inconvenience rather than a problem, but even so there are ways to minimize such inconveniences.

On the taxable side look into tax free municipal bonds.

If you have any low tax years prior to needing to do RMDs do IRA to ROTH conversions.

Look into a QLAC.

If you want to leave a legacy investigate charitable giving and trusts.
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Old 09-27-2015, 12:45 PM   #11
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What? Where did you get this? When I do my taxes, I certainly pay taxes on dividends.

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From the IRS? Again, it's only 0 as long as your total MAGI puts you in the 15% marginal tax bracket. If you're at 25% marginal, then qualified dividends and ltcg are taxed at 15%.
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Old 09-27-2015, 03:24 PM   #12
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What? Where did you get this? When I do my taxes, I certainly pay taxes on dividends. ...
Yes,you do pay taxes on dividends but if your total income is in the 15% tax bracket then the tax rate on qualified dividends and long-term capital gains is 0%.

Go to Taxcaster, select MFJ and put in $80k of qualified dividends and you'll see that the tax is zero. Cool, huh? In fact, if dividends were your only source of income you could have as much as $95,000 and your tax would still be zero.
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A Possible Strategy
Old 10-05-2015, 12:55 PM   #13
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A Possible Strategy

One of the strategies we have used with clients who are philanthropically inclined is to convert a portion of the IRA to a Roth and offset the taxes by funding a Donor Advised Fund with other taxable assets.
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Old 10-05-2015, 01:06 PM   #14
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Your situation looks pretty good to me. You could be like us, and have pensions that are taxed as ordinary income. We send a quarter of our pensions right back to the Treasury that funds them. Any investment income gets taxed, too. Even muni fund income gets taxed, because of the AMT. And we don't even get SS. So councherblessings.
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Old 10-07-2015, 10:00 AM   #15
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We are very thankful that even in retirement we both remain in a high tax bracket.

Yes, we pay a lot of taxes. But we travel frequently and truly understand how fortunate we are to live where we do and have the resources/income that put us in this category.
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Old 10-07-2015, 10:17 AM   #16
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We are in a roughly similar situation, but have quite a bit more in IRAs than you. On the one hand, "BUMMER, we may have to fill the 28% bracket with roth conversions from 56/7 to 71." But, in reality, we avoided subjecting those funds to the highest marginal rate and have benefited from years of tax free compounding.

Look at the bright side--notwithstanding the tax situation, you've won and are in a great position. Brett is right: be thankful. Do what you legally can to minimize the tax hit and enjoy the fruits of your labor.
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Old 10-07-2015, 10:22 AM   #17
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Buy a copy of turbotax and work through some combinations. Use your last year's filing as a baseline and adjust for proposed changes. The tax law is too complicated to do it in your head or a piece of paper. You could create a spreadsheet, but the program is much easier and has been error checked.

You may be pleasantly surprised. In any case, like many above have said, be grateful for your situation and don't let taxes spoil it for you. You still have enough to live like a "little king" in this, one of the richest of nations in the world.
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