Taxable, Tax Deferred, Not-Taxed?

[ttvjef]

Hi all,
I’m trying to get my accounts organized as far as their tax status is concerned, and wanted to run the question by the forum.

Are there primarily three categories of tax status and what do they mean?

Taxable = This would be my brokerage account, savings accounts.

Tax-Deferred = This would be accounts that you do not pay taxes on until you withdraw the money, as in Traditional IRA and 401k.

Non-Taxable= This would be a Roth IRA.

The one I am not positive about is the Non-Taxable account. For a Roth, does that mean that when I reach 59.5 I can withdraw from the Roth, and that money is not taxable? In that I can withdraw $12,000 / year and not report that as income?

 

[hnzw_rui]

The one I am not positive about is the Non-Taxable account. For a Roth, does that mean that when I reach 59.5 I can withdraw from the Roth, and that money is not taxable? In that I can withdraw $12,000 / year and not report that as income?

I'm not exactly sure if you don't report it at all on your tax return but as far as current law is concerned, you don't have to pay tax on Roth distributions as long as you satisfy the 59.5/5-year rule. Heck, you could withdraw $1,000,000 from your Roth IRA and not have to pay any taxes on that $1M.

 

[RunningBum]

Yes. tIRA/401K funding is deducted from your income before taxes when you contribute. Roth IRA is not deducted so you've already paid taxes on that money. And, it's put in a special account so future gains are not taxed, as they are in a brokerage or regular individual mutual fund account.

 

[ttvjef]

Thanks for the reply's.

I'm looking over my plan and have read some threads about converting tIRA to Roth, as a method to be able to get a ACA subsidy, as in my case mt roth accounts are ~160k, tIRA ~ 800k.

I have so much to lean and figure out about ER. Especially the best way to afford health care. In earlier stages of planning for ER, we more or less were budgeting $15k /year for health care. Now I wonder if I can adjust/lower my income to try and get an tax break. I'm 54.5 and spouse is 55.5, so planning to er in 2016/2017 respectively.

 

[RunningBum]

I'm looking over my plan and have read some threads about converting tIRA to Roth, as a method to be able to get a ACA subsidy, as in my case mt roth accounts are ~160k, tIRA ~ 800k.

In that thread I think the original poster had so little income that he needed to raise it to get an ACA subsidy and avoid medicaid. Doing a Roth conversion seemed like the best way, though for some reason that seemed to be rebuffed by the OP.

For more people, keeping income low enough to get the ACA subsidy is a challenge, and it limits how much, if any, of their Roth they can convert each year.

Once you're ER'd, before you start collected SS and perhaps a pension, your income should be pretty limited to dividends and cap gains on your taxable account. Unless you have a side source like rental income.

 

[ttvjef]

Yeah it seems like it may be a challenge to keep under 70k gross in ER. So far our plan to support our ER lifestyle is acquire 7500-8k per month net. This would come exclusively from the portfolio, and a pension I receive at 55. Then supplemented by SS at FRA.

Until we get to medicare I'm trying to research the best way to get and pay for healthcare. If paying for healthcare was not so expensive, I'd ER today

 

[523HRR]

In my Taxable I include Demand Deposits, Savings Accounts, Money Market and Brokerage Accounts. In my Tax Deferred I include Deferred Compensation, Traditional IRAs / 401Ks, Voluntary Pension Contributions and Life Insurance cash value. In my Tax-Free I include Roth IRAs / 401Ks, ESAs, 529s and HSAs.

 

[jim584672]

Yeah it seems like it may be a challenge to keep under 70k gross in ER. So far our plan to support our ER lifestyle is acquire 7500-8k per month net. This would come exclusively from the portfolio, and a pension I receive at 55. Then supplemented by SS at FRA.

Until we get to medicare I'm trying to research the best way to get and pay for healthcare. If paying for healthcare was not so expensive, I'd ER today

Perhaps get a catastrophic policy?

 

[ttvjef]

@jim584672- Yup.

Been looking at what is referred to as high deductible plans, is that the same as catastrophic?

The prices vary quite a lot depending on where you live. In the beginning of our ER we will most likely be in NJ then plan to re-locate south. Warmer weather and less expense.

 

[pb4uski]

I retired a few years ago. Like you, at first I was anticipating taking advantage of Obamacare subsidies, but I ultimately decided that we were better off foregoing the subsidies so we can do higher Roth conversions to the top of the 15% tax bracket and spend less time in the 25% tax bracket later in life once SS and my pension starts.

It helped big time that we were able to buy a bronze level plan for about $630/month for two. Later, we were able to buy catastrophic health insurance even though we are over 30 because the cost of a bronze plan is more than 8% of our MAGI, so we currently pay $456/month for two.

You can look for the cost of plans using healthsherpa.com.

Since you are in NJ, I'll also suggest this article.

Obamacare: How affordable is health insurance after the Affordable Care Act? | NJ.com

…..The federal government, however, provides a specific definition. Under the new law, individuals must pay a penalty if they do not have health insurance unless the cheapest available plan would cost more than 8 percent of their modified adjusted gross income. The federal government deems any plan that costs more than that "unaffordable."

Unaffordable by definition

An analysis of insurance plans on the new exchange found many residents in New Jersey who are in their 50s and 60s will find insurance unaffordable by the government’s own definition.

For example, a 60-year-old in New Jersey won’t find an individual health insurance plan on the exchange for less than $600 per month. Anyone who earns between $45,960 — the level at which subsidies stop — and $90,000 would be exempt from the penalty because the federal government considers that unaffordable.

Two 60-year-olds shopping for a family plan will pay almost $14,000 annually for the cheapest plan. Their income would have to be about $178,000 to meet the government’s "affordability" test. That’s more than twice the median household income for New Jersey residents ages 45-64, according to the U.S. Census.

Plans on the exchange are based on metallic tiers — platinum, gold, silver and bronze. The cheapest plans, the bronze, often pay only 60 percent of medical costs and have deductibles that are more than $2,300, putting them beyond the reach of many New Jersey families. Those who do not meet the "affordability" test are eligible to buy catastrophic coverage on the exchange, where plans are typically about $100 cheaper per month. Premiums are based, in part, on age. The older you get, the more health insurance costs because insurance companies believe older people are a greater risk for expensive care. …… (emphasis added)