SS at 70 and RMDs - double tax 'whammy'?

[Looking4Ward]

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Originally Posted by pb4uski What I would do is start with the taxable income for the tax bracket you want to stay in, add your exemptions and deductions (or the standard deduction if higher), add your HSA contribution deduction if applicable and then reduce it buy your capital gains and dividends. So for a couple, the top of the 15% bracket for 2014 is $73,800 + 2 exemptions at $3,950 each + standard deduction of $12,400 + HSA deductions of $8,550 would mean total income of $102,650. Subtract your dividends and capital gains and other income from that any you get a rough estimate of what you can convert and stay in the 15% bracket. Then multiply by 15 years. In reality, the amount will increase somewhat each year assuming that you are reducing your taxable funds and your dividend and capital gain income plus the various elements above increase periodically for inflation. Obviously, you need to adjust it to your specific tax situation.

Thanks, that made perfect sense to me.

[GrayHare]

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Originally Posted by LongPrime Why non-div stock?

Because then you'll pay no taxes until you sell. Choose a company that does a good job of investing in itself what it would have paid out in dividends and you'll get tax-free growth. This is Buffett's approach with Berkshire Hathaway, and why BRK-A and BRK-B do not pay dividends.

[donheff]

My math and spreadsheet skills are too rudimentary to test out Midpack's approach. DW and I have sufficient taxable pension income to keep us from taking any advantage of Roth conversions and the like. By withdrawing additional funds solely from taxable we are able to keep AGI within the 25% bracket for now. If we were to add, or even mix in, much in the way of IRA withdrawals we would slip over into 28%. My thinking has been that any extra taxes I pay now are current expenses that deplete the portfolio. While this may be evened out later with reduced future taxes I worry more about sequence of returns risk. I strikes me that the longer we can keep the portfolio up the likelier we will survive any sudden downturns in the relatively early years. Also, as we get older (~75-80) it is likely that our travel expenses will drop as we chill out. Bottom line is we will get torpedoed big time when DW reaches 70.5 and I'm not sure whether what we are doing is the best approach or not.

[SteveL]

What some forget, is that growth of values may continue amidst a series of partial Roth conversions. Over the time I have been converting, the tax deferred account has grown enough to exceed the amount converted. This despite the 2008 recession. I've a couple of years left before 70.5, but it is kind of hopeless. I am going to just have to suck it up and pay the tax. It is kind of funny, because all the tax deferred bucks came from my employer which had a very generous retirement scheme, and from my floating along with the market. If interest rates increase, it will just mean more tax to pay!

[braumeister]

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Originally Posted by SteveL What some forget, is that growth of values may continue amidst a series of partial Roth conversions. Over the time I have been converting, the tax deferred account has grown enough to exceed the amount converted.

This is why my Fido rep recommended maximizing the non-equity proportion in my trad IRA. He saw that I was concerned about higher taxes at RMD time, and pointed out that this would help the TIRA balance to not grow so much, thereby keeping the RMD amounts down.

[jj]

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Originally Posted by SteveL What some forget, is that growth of values may continue amidst a series of partial Roth conversions. Over the time I have been converting, the tax deferred account has grown enough to exceed the amount converted. This despite the 2008 recession. I've a couple of years left before 70.5, but it is kind of hopeless. I am going to just have to suck it up and pay the tax.

Yes, but just think how much 'worse' it would have been had you not done any Roth conversions. A nice position to be in....

[Animorph]

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Originally Posted by donheff My math and spreadsheet skills are too rudimentary to test out Midpack's approach. DW and I have sufficient taxable pension income to keep us from taking any advantage of Roth conversions and the like. By withdrawing additional funds solely from taxable we are able to keep AGI within the 25% bracket for now. If we were to add, or even mix in, much in the way of IRA withdrawals we would slip over into 28%. My thinking has been that any extra taxes I pay now are current expenses that deplete the portfolio. While this may be evened out later with reduced future taxes I worry more about sequence of returns risk. I strikes me that the longer we can keep the portfolio up the likelier we will survive any sudden downturns in the relatively early years. Also, as we get older (~75-80) it is likely that our travel expenses will drop as we chill out. Bottom line is we will get torpedoed big time when DW reaches 70.5 and I'm not sure whether what we are doing is the best approach or not.

If you expect to move up into the 28% bracket or even higher with RMD's, then it is OK to Roth convert now up to the 28% bracket top. That way you pay the same tax on your tIRA, but you get to hold more after-tax value in the Roth. The net result is like moving funds (equal the the tIRA withdrawal tax) from your taxable account into the Roth, where they are no longer taxed. Of course other tax considerations (AMT, >250k AGI for couples, and more) may also impact the value of converting.

[samclem]

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Originally Posted by donheff If we were to add, or even mix in, much in the way of IRA withdrawals we would slip over into 28%.

Well, if it's any consolation, you're already taking the most bitter medicine (the jump from 15% to 25%). A lot of us are trying to avoid that, but you are already used to the pain. As thoroughly as you are getting whipped, you'll probably barely notice the extra 3%.
Is it time for extraordinary measures? A trust, muni's etc?

[samclem]

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Originally Posted by Animorph If you expect to move up into the 28% bracket or even higher with RMD's, then it is OK to Roth convert now up to the 28% bracket top. That way you pay the same tax on your tIRA, but you get to hold more after-tax value in the Roth.

I'd have a hard time committing to that course of action. Pay tax now at 28% (to save 3%), when donheff is just one big market drop away from maybe being in a lower rate? (And this would go double if it taxable income were primarily RMDs, not steady pensions). If that big drop happens, they'd probably really miss that money that was spent in taxes. And who knows what type of surprises might be in store for high-income ROTH holders as we move ahead? Nope, I wouldn't do it just to save 3% on the growth, I'd defer as long as possible, and if the gummint gets a big share of a bigger pot as we near the endgame, so be it. Obviously, things would be different if we needed to pass along resources intergenerationally.

[Fishingmn]

I've been worrying about this too (52).

My issue is that we have 10 rental properties that will be funding 60% of our retirement income needs. The income from those will limit any Roth conversion options. Makes it confusing as to whether it makes sense to take SS early, consider selling the properties now (and absorb a 6 digit CG hit) or just bite the bullet when the time comes. ACA plays into it too. Too many things to try and model and too far away from now which makes possible governmental change likely anyway.

[kaneohe]

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Originally Posted by GrayHare Welcome to the tIRA/401k tax trap. The Hindsight Department reports it would have been better to invest in non-dividend growth stocks outside the tIRA/401k trap: no RMDs and no taxes unless you sell, and then the tax is only the CG rate.

Are you speaking in general or for this specific case (OP)? On bogleheads, there seems to be a very distinct preference for the TIRA/401K (or perhaps they're just the loudest).

[GrayHare]

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Originally Posted by kaneohe Are you speaking in general or for this specific case (OP)? On bogleheads, there seems to be a very distinct preference for the TIRA/401K (or perhaps they're just the loudest).

It's for the OP, as well as anyone who projects to not move into lower tax brackets during their 70s. Given the saver-mentality of us FIRE types, the problem of high tax due to RMDs is more likely for those of us here than at bogleheads.

[samclem]

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Originally Posted by Fishingmn I've been worrying about this too (52). My issue is that we have 10 rental properties that will be funding 60% of our retirement income needs. The income from those will limit any Roth conversion options.

I woudl think that your ability to depreciate those properties might give you some flexibility--for awhile. Of course, when you sell, the taxes would be brutal.
As far as timing: unfortunately, your age is when you sometimes have to start thinking about these things. Some people need every year between their mid-fifties and when RMDs and SS kick in to slowly convert tIRAs and 401Ks to Roths (thereby avoiding higher tax rates that they'd encounter if they did it in fewer years).

BTW, we keep talking about Roth conversions, but something similar can be accomplished by just withdrawing from the tIRAs under the 72t provisions. It's less flexible and the amounts are limited, but it's another way to reduce the eventual RMD "bite" by getting money out of these tax-deferred accounts before age 70.5.

[youbet]

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Originally Posted by SteveL I am going to just have to suck it up and pay the tax!

Poor baby!

I have to do the same Steve and try to remind myself that not having the income, and resulting tax responsibility, would be less desireable than having the income and paying the taxes.

Possibly some clever planning might have reduced the pain. We all made informed decisions as we went along. Delay SS or pensions for more income later? Save money on a tax deferred or taxable basis? Invest in instruments where the divs and int are taxed as ordinary income? Realize short term CGs? Etc.

When 70ish comes around, finding yourself in a HIGHER tax bracket than you were in your earlier retirement years is the result of our own previous decisions, so look in the mirror and meet the guy who is responsible for it happening!

[eytonxav]

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Originally Posted by youbet Poor baby! I have to do the same Steve and try to remind myself that not having the income, and resulting tax responsibility, would be less desireable than having the income and paying the taxes. Possibly some clever planning might have reduced the pain. We all made informed decisions as we went along. Delay SS or pensions for more income later? Save money on a tax deferred or taxable basis? Invest in instruments where the divs and int are taxed as ordinary income? Realize short term CGs? Etc. When 70ish comes around, finding yourself in a HIGHER tax bracket than you were in your earlier retirement years is the result of our own previous decisions, so look in the mirror and meet the guy who is responsible for it happening!

You get the award for empathy

[MichaelB]

I agree with Youbet. Probably because my grandfather said the same thing, and he was a wise man.

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Originally Posted by youbet I have to do the same Steve and try to remind myself that not having the income, and resulting tax responsibility, would be less desireable than having the income and paying the taxes.

Also because all of our retirement savings is in taxable accounts. Paying taxes is painful, many benefited from tax deferral earlier in their lives. I suspect most people have second thoughts about this, regardless of the choices they make, because we never know what our future finances will be. No doubt, though, that the lower tax bite of a t-IRA contribution twenty years ago sure felt good then.

[Animorph]

Even if your tax rate is the same between money-in and money-out with a tIRA, you are still getting tax free growth as long as your money is in there. Still beats a taxable account. Now if your tax rate out of the tIRA is higher than when contributions went in, I might start thinking of feeling sorry for you guys.

[donheff]

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Originally Posted by youbet I have to do the same Steve and try to remind myself that not having the income, and resulting tax responsibility, would be less desireable than having the income and paying the taxes.

+1 Yup, I realize we are in an enviable position having these big tax liabilities. DW has some considerable numbers in her 401Ks but she got them with a large untaxed employer contribution and decades of tax free growth. Same deal with my pension - the employer contribution was massive and the taxable status is appropriate. It is time to pay the piper.

[Shawn]

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Originally Posted by youbet I have to do the same Steve and try to remind myself that not having the income, and resulting tax responsibility, would be less desireable than having the income and paying the taxes.

If having income is so desirable, why would anyone choose to ER? Most people lose a sizable fraction of their income stream when they retire. They choose to have less income and less tax responsibility. Apparently, having income isn't as desirable as it sounds. More may be better than less when everything else is equal - but everything else is rarely equal.

I agree that at some point it is "time to pay the piper" with respect to tax deferred income. I will take reasonable actions to minimize my tax bite, but there is only so much that can be done.

[GrayHare]

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Originally Posted by Animorph Even if your tax rate is the same between money-in and money-out with a tIRA, you are still getting tax free growth as long as your money is in there. Still beats a taxable account.

Actually the end $ amount is the same whether you invest after tax dollars outside a tIRA or defer taxes via a tIRA. Uncle Sam gets his cut either way, and once you pay the tax the end $ value you have is identical.