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Tax Deferred Retirement Plan
Old 01-28-2018, 08:38 AM   #1
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Tax Deferred Retirement Plan

Many now in retirement years have been in the 401K plan and have a large number to retire too. There has been a few threads on this.

Is having to much tax deferred retirement money a problem you see. In my case if I wait to take money from those accounts at RMD time they could double easily in 12 to 14 years. I have run the numbers and in my case if I start taking money from those accounts now I lose in many other ways with having the extra income (ACA) for example.

I will not avoid even if I start now taking from those accounts and staying under the guide lines (HCI) for being in the higher tax bracket at RMD time.

So in my case would it be better to just wait and take RMD when I'm required to do so or start now. The thing is I don't need the money and would like it to grow for other reasons. I also would like to do the best for tax purposes but I can't avoid the higher tax bracket any way.
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Old 01-28-2018, 08:56 AM   #2
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You did not state the tax bracket now vs the tax bracket during RMD time. You did mention ACA and my theory is that anything that kills ACA is to be avoided, because it could cost you $20k or more in one year. Many are doing the best they can to keep ACA then heavily draining/Roth converting those deferred tax accounts between 65 and year you have to take RMDs. (April 1st after reaching 70.5).
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Old 01-28-2018, 09:19 AM   #3
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If ACA is a constraint then you options will be more limited. However, one thing to look at is whether the ACA benefit exceeds the benefit of low cost Roth conversions now.


In our case, our ACA subsidy benefit would be low because we live in a state that does not allow age rating and we can take advantage of an ACA provision that allows those over 30 to buy a catastrophic plan if the lowest cost bronze plan exceeds 8.16% of our income and the difference in cost between our cat plan and a subsidized ACA plan is only ~$5k a year.... so I have prioritized low-cost Roth conversions over managing income to qualify for ACA subsidies... we can do ~$50k a year and pay ~8% vs 22%/25% if we do it later so the tax savings exceed the ACA subsidy benefits.


Now if our ACA benefit was $20k a year then we would probably make that a priority and suck up and pay the tax torpedo later.
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Old 01-28-2018, 09:29 AM   #4
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Originally Posted by pb4uski View Post
If ACA is a constraint then you options will be more limited. However, one thing to look at is whether the ACA benefit exceeds the benefit of low cost Roth conversions now.


In our case, our ACA subsidy benefit would be low because we live in a state that does not allow age rating and we can take advantage of an ACA provision that allows those over 30 to buy a catastrophic plan if the lowest cost bronze plan exceeds 8.16% of our income and the difference in cost between our cat plan and a subsidized ACA plan is only ~$5k a year.... so I have prioritized low-cost Roth conversions over managing income to qualify for ACA subsidies... we can do ~$50k a year and pay ~8% vs 22%/25% if we do it later so the tax savings exceed the ACA subsidy benefits.


Now if our ACA benefit was $20k a year then we would probably make that a priority and suck up and pay the tax torpedo later.
That makes sense for a tax benefit. If I'm looking for growth more then anything else would it be worthy to just wait till RMD age to access the money?

Yes if I waited till RMD I would be with the new tax guidelines in the 22% or 24% tax bracket.
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Old 01-28-2018, 09:34 AM   #5
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No, growth doesn't matter... the only thing that matters is today's tax rate vs what you would pay later.


[$100 * (1+7%)^10]*(1-22%) = [$100*(1-22%)]*(1+7%)^10


So if you have $100 in tax deferred and let it grow at 7% for 10 years and then withdraw and pay 22% tax it is the same as doing a Roth conversion now, paying 22% tax and letting the $78 grow for 10 years at 7%.


Now, if you pay the tax with taxable account funds then there may be a minor benefit to doing the Roth conversion now vs later if earnings on the taxable account money is subject to tax.... but in a lot of cases if that money is in equities then the tax rate is 0% or 15% so the benefit is negligible.
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Old 01-28-2018, 09:55 AM   #6
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^ I'm sure glad for the money wise people we have here. Thank you for the illustrations that makes it easy for this slow learner to understand. LOL

Thanks
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Old 01-29-2018, 06:40 AM   #7
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Quote:
Originally Posted by street View Post
Many now in retirement years have been in the 401K plan and have a large number to retire too. There has been a few threads on this.

Is having to much tax deferred retirement money a problem you see. In my case if I wait to take money from those accounts at RMD time they could double easily in 12 to 14 years. I have run the numbers and in my case if I start taking money from those accounts now I lose in many other ways with having the extra income (ACA) for example.

I will not avoid even if I start now taking from those accounts and staying under the guide lines (HCI) for being in the higher tax bracket at RMD time.

So in my case would it be better to just wait and take RMD when I'm required to do so or start now. The thing is I don't need the money and would like it to grow for other reasons. I also would like to do the best for tax purposes but I can't avoid the higher tax bracket any way.
Rich people problems!

But yes, I feel your pain. I have a recent thread or 2 out there essentially asking for the same help. I am heavily weighted (currently 60%) in tax differed accounts with plans to work 2 more years (2 more years of 401K contributions) before I RE at 55. For now, I have broken down my RE spending "problem" (as it relates to what sources I draw down from) into 3 buckets... 1) age 55 - 59.5, 2) 60 - 70, and 3) 70 +. I am planning on some healthy annual spending ($250K - $300K) so minimizing the tax impact is important to me. For now, until I can be convinced otherwise, I am planning to live out of taxable accounts (little to no tax) for phase 1) and then figure out phase 2) and 3) when I get there. I am at risk of my RMDs in phase 3) producing way more income than I would prefer, thus more taxes, but I get a little dizzy trying to run 72T models and forecasting future tax implications.

Let me know when you figure it out. I am still banging this out and hope someone on this site can give me the silver bullet!
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Old 01-29-2018, 07:44 AM   #8
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Rich people problems!

But yes, I feel your pain. I have a recent thread or 2 out there essentially asking for the same help. I am heavily weighted (currently 60%) in tax differed accounts with plans to work 2 more years (2 more years of 401K contributions) before I RE at 55. For now, I have broken down my RE spending "problem" (as it relates to what sources I draw down from) into 3 buckets... 1) age 55 - 59.5, 2) 60 - 70, and 3) 70 +. I am planning on some healthy annual spending ($250K - $300K) so minimizing the tax impact is important to me. For now, until I can be convinced otherwise, I am planning to live out of taxable accounts (little to no tax) for phase 1) and then figure out phase 2) and 3) when I get there. I am at risk of my RMDs in phase 3) producing way more income than I would prefer, thus more taxes, but I get a little dizzy trying to run 72T models and forecasting future tax implications.

Let me know when you figure it out. I am still banging this out and hope someone on this site can give me the silver bullet!
I look at it that for over 40 years I didn't have to pay tax on this money and I know I have too. I don't know if there is a silver bullet or not. I will pay the higher tax bracket regardless if I start taking funds now or waiting.

I guess in my case I might as well wait till RMD to take the funds. I will only have to take a % out each year and continue to not pay tax on the rest for another year. By then I may not have anything in those accounts because of a crashed market and there will little tax then or tax rate maybe lower at that time. Now with new tax law I will less at RMD because of lower tax brackets. LOL

For me it is a problem. One guy told me once the more you have the more problems you have also. I believe that in life in more then one way.
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Old 01-29-2018, 07:50 AM   #9
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We have about 40% of our Nestegg is Tax Deferred and the other 60% has had all the tax paid. Currently we live off the Taxed portion and managed so far to get a Full ACA Subsidy (Zero Premium for a Great Plan). I guess it is worth about $26k this year.
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Old 01-29-2018, 08:16 AM   #10
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^ I'm sure glad for the money wise people we have here. Thank you for the illustrations that makes it easy for this slow learner to understand. LOL

Thanks


Yes, middle school algebra is sometime difficult. :>)
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