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Old 12-03-2012, 10:15 AM   #21
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Originally Posted by pb4uski View Post
How would Michigan know your "exact tax liability" until you file your return?
I would assume it's a flat tax rate, with no deductions.

As for us? We pay no taxes on any withdrawls (along with SS, pension, SPIA, etc. income).

When we did our respective 401(k) to IRA rollovers, there was no tax involved (federal, state, or local). The state/local taxes were paid at the time of the contribution; however gains after that time are not taxed, regardless of the amount. FIT will be paid upon withdrawl.

We have a standard 15% taken out of our monthly TIRA withdrawls, and in December (when we get our TurboTax software), we adjust that tax amount in order to try to have no more than $50 +/- due in FIT. Last year I skipped the December tax payment. This year, both DW/me will let the December tax payments be paid as normal. We have a bit more income this year due to DW's retirement in March along with a lot of vacation/sick pay income upon her leaving her company.

We don't file quarterly, since we have no outside income and the FIT is paid monthly...
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Old 12-03-2012, 11:16 AM   #22
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Originally Posted by rescueme View Post
When we did our respective 401(k) to IRA rollovers, there was no tax involved (federal, state, or local). The state/local taxes were paid at the time of the contribution;
I understand there are no taxes on rollovers. But, I thought that 401K contributions are not taxed by both federal and state. I wonder if it varies from state to state, but here in IL, 401K contributions are not taxed.
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Old 12-03-2012, 11:17 AM   #23
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OT or is it? There will be some periods when we start RMD that we will be on the (presently) 25% tax bracket. Would it be wise to up my Roth conversion before RMD so that some of the amounts will be on the 25%.
The conventional analysis suggests that if you convert to Roth or withdraw from TIRA at the same tax rate, the Roth is ahead if you pay the conversion taxes from outside sources and the Roth/TIRA are equal if you pay conversion taxes from the TIRA.

That suggests that if you convert at 25% or withdraw at 25% , the deciding factor might be where you pay the conversion tax from. Some other factors: if tax rates go up in future, then it might be beneficial to convert to convert more. A complicating factor: if you have significant qualified dividends/LTCG, converting more into the 25% bracket might actually result in a 30% effective rate now (15% on the extra conversion if still in the 15% bracket for ordinary income + 15% on QDIV/LTCG displaced into the 25% bracket).
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Old 12-04-2012, 09:25 AM   #24
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Originally Posted by KingB View Post
I understand there are no taxes on rollovers. But, I thought that 401K contributions are not taxed by both federal and state. I wonder if it varies from state to state, but here in IL, 401K contributions are not taxed.
It does vary from among the states. Rescueme is in PA. PA does not give you a deduction for 401k or IRA contributions at all. And withdrawals from 401k or IRAs or not taxable if taken after normal retirement age (coded as 7 or 4 on a federal 1099-R). If early withdrawal, PA will tax that part of the withdrawal that exceeds your cost in the retirement plan.
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Old 12-04-2012, 10:22 AM   #25
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Originally Posted by RE2Boys View Post
It does vary from among the states. Rescueme is in PA. PA does not give you a deduction for 401k or IRA contributions at all. And withdrawals from 401k or IRAs or not taxable if taken after normal retirement age (coded as 7 or 4 on a federal 1099-R). If early withdrawal, PA will tax that part of the withdrawal that exceeds your cost in the retirement plan.
Exactly.

Additionaly, any gains from the point of contribution (when taxes are paid) are tax free (assuming you are retired) for state/local purposes.

Since our contributions were taxed at the time of contribution (since 1982) we have a lot of gains that are not taxed by our state/local government. Of course, FIT will be paid as we withdraw. Even that (with a mixture of non-deductable IRA's, such as the 11 year period of 1987-97, along with Roth IRA's) keeps our total FIT low.

Also, when DW starts her two (small) pensions in six months, along with SS a year after that, no state/local taxes are due. It's the same for me, concerning SS. I'll be claiming 50% of DW's SS when she files, for 3.5 years until I turn 70 and then claim my own. No state/local taxes due.

Additionally, our joint lifetime SPIA (purchased when we retired, after the age of 59.5) is also free of state/local taxes. It was purchased with part of tax-deferred funds I received from my former company from their cash balance retirement plan after I retired. Of course, I do pay FIT on the annual distribution, but nothing on the state/local side.

PA treats retires well tax-wise, IMHO.
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Old 12-04-2012, 12:26 PM   #26
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The conventional analysis suggests that if you convert to Roth or withdraw from TIRA at the same tax rate, the Roth is ahead if you pay the conversion taxes from outside sources and the Roth/TIRA are equal if you pay conversion taxes from the TIRA.

That suggests that if you convert at 25% or withdraw at 25% , the deciding factor might be where you pay the conversion tax from. Some other factors: if tax rates go up in future, then it might be beneficial to convert to convert more. A complicating factor: if you have significant qualified dividends/LTCG, converting more into the 25% bracket might actually result in a 30% effective rate now (15% on the extra conversion if still in the 15% bracket for ordinary income + 15% on QDIV/LTCG displaced into the 25% bracket).
I was playing with H&R Block Taxcut and I saw your point regarding the 30% tax rate (more like 33%). Worse, when I tried increasing my coversion from 20K to 25K, the tax increased from 6094 to 8295 - a 44% tax rate. THis is when AMT kicked in. Hard to comprehend paying 44% now to avoid paying 25% later. I just might limit my conversion to 20K.
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Old 12-04-2012, 07:06 PM   #27
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Worse, when I tried increasing my coversion from 20K to 25K, the tax increased from 6094 to 8295 - a 44% tax rate. THis is when AMT kicked in.
The taxcut software that I have been using is not the final release. As such, the AMT exemption that it is using is the original amount - $45000. This amount is changed yearly by our lowmakers. Last year, the exemption was $74450.

I want to keep it safe - I will stick to 20K conversion in case the exemption does not get changed.
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Old 12-04-2012, 07:41 PM   #28
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To summarize -

1) If you roll from your 401 to a REGULAR IRA - **AND** you do it "institution to institution" there is no current tax liability. DO NOT HAVE the check from the 401 made to YOU.

a) Subsequent withdrawals from the IRA are taxable as ordinary income, and if you are +59 1/2 there is no early withdrawal penalty. There MAY or MAY NOT be withholding on the withdrawal depending on the IRA custodian, and the choices offered to you at withdrawal time. REMEMBER State taxes too if your State taxes retirement incomes. The exact amount of the tax due CANNOT be known at the time of withdrawal. It depends on your total tax situation - pension, interest, dividends, rental income, part time j*b. SO, if you have (say) 20% withheld, that may be MORE or LESS than the actual amount due. As always, that difference, either way, flushes out on April 15th with either a refund or a balance due. "Quarterly Estimated payments" can keep you from BOTH a large balance due ##AND## related underpayment penalties. Consult a tax professional for additional information. (n.b. - PM me off list and I would be willing to give more personal advice)

2) For funds rolled to a ROTH IRA, that amount rolled is treated as a current year distribution and taxed as ordinary income. BUT then the funds in the ROTH, **INCLUDING FUTURE EARNINGS** are distributed to you tax free. (The longer you plan to leave THAT portion IN the Roth the more benefit - you are paying income tax UP FRONT on the account in exchange for not having to pay taxes on potential future earnings)

NOTE: I believe there is ONE additional difference between 401(k) and IRA accounts that gets overlooked - I **believe** that in the event of death there are different rules for how fast the beneficiaries HAVE to take the funds. And I beleive that it is more beneficial to the beneficiaries to have the inheritance in the form of a 401(k) than an IRA. Not 100% certain - I recall having that discussion with our 401/457 rep when I rolled my 401 out of the company plan to Vanguard.

Lastly, I do NOT know what the risk is that C*ngress could change the ROTH rules and institute a tax ANYWAY. Just a disclosure of another (minor) risk.
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Old 12-04-2012, 08:44 PM   #29
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This amount is changed yearly by our lowmakers.
Typo, or subtle political ploy?
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Old 12-05-2012, 07:03 AM   #30
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When you ask your IRA administrator for a payout you will fill out a form to choose your withholding tax. You can also do this on a W-4P. The usual rate of withholding on IRA income is 10% although you can choose no withholding if you are resident in the USA. If you live outside the US it's 10% mandatory withholding for US citizens and 30% of non-resident aliens unless a lower rate is specified in a tax treaty.
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