Trying to understand a withdrawal plan.

[Badger]

My wife and I will both be retired by May. I will be 63 and she will be 65. I am trying to plan how I should access money from our various sources to keep taxes to a minimum as well as avoid paying taxes on Social Security. I understand that we have to keep our income below $14,120/yr for each of us (I think) to keep 100% of our SS. I would appreciate some guidance/suggestions, maybe a good book, or at least a comprehensive chapter dedicated to minimizing taxes during retirement.
Our sources of money will be:
1. Social Security
2. Small pensions from military and civilian jobs
3. Stocks – dividends only (If possible)
4. Taxable Mutual Funds – dividends only again
5. Savings accounts, CD’s, MM accounts, etc. – interest only
6. Roth IRA accounts
7. Cash in the bucket
8. Traditional IRA accounts

If the money from SS is free and clear as long as we don’t have a combined income of over $28,240 then is the only taxable income (for computing tax on SS money) from a paycheck from a job and cashing in some of the traditional IRA shares? I know items #2-6 are taxable income but are they considered as income for reducing our SS paycheck?

After budgeting the money from items #1 & 2 I was thinking of taking the dividends and interest from items #3 – 5 and making up the difference in what we will need from the traditional IRA accounts (not to exceed $28,240. If more was necessary for living expenses I would then use some cash from the bucket or Roth IRA.

If this is correct then our taxes would only be computed on the $28,240 and we keep 100% of our SS money. After we reach 66 then we keep 100% of our SS regardless of earnings.

Did I get this right? Am I missing something?

Cheers!

 

[MasterBlaster]

Check out the Optimal Retirement Planner Calculator (ORP) website. They have a tax-optimal spend-optimal retirement withdrawal method given a fixed rate of return:

Optimal Retirement Calculator and Retirement Decision Support System

 

[LOL!]

Even tax-exempt interest is included in the calculation on whether your SS benefits will be taxed or not. Did you miss that?

 

[walkinwood]

Read this thread too
http://www.early-retirement.org/for...taxable-ira-and-ss-revenue-streams-53063.html

Edited to add
See this too
http://www.irs.gov/publications/p915/ar02.html#en_US_publink100097869

 

[Alan]

This was discussed on the Forum recently and is a very good read explaining the complex rules calculating how much of your SS will be taxed, and it includes a worked example. You can register for free on the site and get the guide as a free pdf download.

The Retirement Pros :: Login or Register

 

[Badger]

Thank you for the resources. It looks like I have a little reading/studying to do with all the links. This is the type of information I have been looking for but wasn't sure what would be reliable from just doing a google search.
We have done alright saving on our teacher salaries. That was the easy part when you have frugal parents to teach you and when you marry an understanding wife.
However, I have made some bad decisions with a few past investments and with my pension. That will cost us a more comfortable retirement so I want to avoid any more mistakes with what we have to live on.
LOL!, I was surprised that interest from an IRA is used in the formula to determine if SS is taxed. I thought that it was only used when it is withdrawn.
Lots more to learn. It's starting to feel like a new job.

Cheers!

 

[LOL!]

...
LOL!, I was surprised that interest from an IRA is used in the formula to determine if SS is taxed. I thought that it was only used when it is withdrawn.
Lots more to learn. It's starting to feel like a new job.

Cheers!

Sorry, by "tax-exempt interest" I meant tax-exempt muni-bond interest, not interest from an IRA.

Your retirement and money management is a full-time job.

 

[DblDoc]

Taxes is another area where limiting yourself to dividends only will cost you. The long term capital gains rate will remain lower than the corresponding rates for dividends (subject to change of course). Additionally spending your cost basis for shares sold costs you nothing in taxes. It sure does add a layer of complexity though.

DD

 

[Alan]

Taxes is another area where limiting yourself to dividends only will cost you. The long term capital gains rate will remain lower than the corresponding rates for dividends (subject to change of course). Additionally spending your cost basis for shares sold costs you nothing in taxes. It sure does add a layer of complexity though.

DD

I agree on taxable accounts.

Once you start drawing down your 401k and IRA's I can't see that it matters. If I have a load of money in an IRA with a cost basis of zero (such as after I've rolled a 401k), then having the dividends paid into a taxable cash account will be taxed the same as selling shares within the IRA and transferring the proceeds. The same would be true of a Roth - no taxes on withdrawals whether it be dividends or capital gains.

Am I right in this? (I have about 4 years to figure this stuff out before I'm eligible)

 

[Badger]

Sorry, by "tax-exempt interest" I meant tax-exempt muni-bond interest, not interest from an IRA.

Your retirement and money management is a full-time job.

Thanks for the clarification. I'm still trying to learn the language of personal finance. So far I have figured out "money in my pocket is mine (temporarily) until it becomes money out of my pocket because the government felt they could manage it better."

Cheers!

 

[Gotadimple]

I agree on taxable accounts.

Once you start drawing down your 401k and IRA's I can't see that it matters. If I have a load of money in an IRA with a cost basis of zero (such as after I've rolled a 401k), then having the dividends paid into a taxable cash account will be taxed the same as selling shares within the IRA and transferring the proceeds. The same would be true of a Roth - no taxes on withdrawals whether it be dividends or capital gains.

Am I right in this? (I have about 4 years to figure this stuff out before I'm eligible)

Just to confirm what I think you mean by:

The same would be true of a Roth - no taxes on withdrawals whether it be dividends or capital gains It is true that all withdrawals from a Roth are (currently) free of income tax, there is no distinction between original funds, or earnings/gains.

It is also true that selling shares in a Traditional IRA is a taxable event, however, only as long as the T-IRA is composed of deductible contributions and earnings (or rollovers from an 401-k). T-IRAs with non-deductible contributions get taxed on the proportion of taxable monies when compared to the value of the account at year-end. Someone who contributed $2,000 to an T-IRA with a current value of $100,000 and who withdrew $10,000, would pay tax on 98% of the $10,000 (2% being the value of already taxed contributions).

However, your example of cash dividends is where there is a wrinkle. Cash dividends are treated differently than transferring assets from a deductible IRA to a taxable account. In the first case, the dividend tax rate is usually lower than the tax in your regular tax bracket. In the second case (the T-IRA sales) are treated at the same rate as income.

It's a bit to keep control of, as another poster said: a full-time job!

-- Rita

 

[Alan]

However, your example of cash dividends is where there is a wrinkle. Cash dividends are treated differently than transferring assets from a deductible IRA to a taxable account. In the first case, the dividend tax rate is usually lower than the tax in your regular tax bracket. In the second case (the T-IRA sales) are treated at the same rate as income.

It's a bit to keep control of, as another poster said: a full-time job!

-- Rita

I still don't get it and am probably not understanding your post. (sorry to labor the issue)

I have a T-IRA, zero cost basis since it was rolled over from a 401k (all contributions to it have been before tax for its 20 year life).

Suppose it is invested in a Wellesley fund and the quarterly dividends and annual capital gains go into a VG MM fund within the IRA and are then withdrawn as a distribution each quarter. Will it be taxed as regular income? - no consideration if the dividends are qualified or if the capital gains are long or short term.

Similarly if the contents are invested in a VG total stock mkt fund and once a quarter I sell some shares into a VG MM fund within the IRA and then withdraw the proceeds as a distribution each quarter. Will it be taxed as regular income? - no consideration if the capital gains are long or short term.

I would think that since the money that initially went into the 401k was before income taxes, then all the money that comes out of the IRA are taxed at the marginal income tax rate of the owner regardless of how much of it was the result of capital gains etc.

 

[LOL!]

It is also true that selling shares in a Traditional IRA is a taxable event, ...

Not if you don't withdraw the sale proceeds from the tIRA. (I know, details, details.)

The other complication is that you have various tax brackets. There is even a 0% tax bracket that you want to use. The i-orp.com calculator can help, but you should be very familiar with doing your own taxes in order to confirm or adjust what it suggests.

 

[Rustward]

...
the dividend tax rate is usually lower than the tax in your regular tax bracket.
... -- Rita

In the same boat with Alan on this one. My understanding is that distributions from a deductible IRA are taxed as ordinary income.

You are talking about federal income taxes, not a particular state income tax, right?

 

[Nova]

Reread Rita's post and pay particular attention to the following:

"T-IRAs with non-deductible contributions get taxed on the proportion of taxable monies when compared to the value of the account at year-end. Someone who contributed $2,000 to an T-IRA with a current value of $100,000 and who withdrew $10,000, would pay tax on 98% of the $10,000 (2% being the value of already taxed contributions)."

If everything in your T-IRA was "pre-tax" contributions, then all distributions will be taxed as ordinary income. At least, that's how I read the tax laws.

 

[Zero]

Add me to the Alan and Rustward category of "not sure I read that right".

Keeping it simple, assume all the money in a T-IRA was contributed pre-tax.

My understanding was that all money taken from the T-IRA, irrespective of it's heritage, is taxed at the taxpayer's normal income tax rate.

Is my understanding of it correct? Would appreciate any help.

EDIT: Add EXAMPLE

Say my entire IRA was Wellesley, and was put there originally as pre-taxed contributions. Then I have Vanguard deposit the dividends from the IRA to my taxable portfolio and into a VG MM.

Is that taxed as dividend tax rate, or taxed as normal income rate?

 

[rescueme]

Add me to the Alan and Rustward category of "not sure I read that right".

Keeping it simple, assume all the money in a T-IRA was contributed pre-tax.

My understanding was that all money taken from the T-IRA, irrespective of it's heritage, is taxed at the taxpayer's normal income tax rate.

Is my understanding of it correct? Would appreciate any help.

Yes, it is as simple as that ...

I'm retired and take all distributions/dividends from my TIRA accounts and add them to my "cash bucket" - a MM account held within my tax-deferred account (you can't transfer it to taxable without paying current income tax due).

Once a month, I transfer from my tax-deferred bucket, pay the current income tax due, and forward it to my respective taxable accounts - used for current expenses.

Pay me now - pay me later; the government will get its "pound of flesh" ...

 

[Zero]

rescueme, thanks, I thought that was clear to be but in the discussions I got a little confused.

PS: I won't hijack the thread any more just saw some others wanting the same confirmation.

 

[Alan]

rescueme, thanks, I thought that was clear to be but in the discussions I got a little confused.

My thanks also to rescueme for a real life example.

 

[Nova]

A little more information:

Roth IRA Advisor

 

[Midpack]

I have not read this yet, but I recently noticed it at B&N and was tempted to buy it. NOLO publications have been good in my experience. You might be able to check it out at your library or flip through one at your local bookseller to see if it would be helpful...FWIW.

 

[Gotadimple]

I still don't get it and am probably not understanding your post. (sorry to labor the issue)

I have a T-IRA, zero cost basis since it was rolled over from a 401k (all contributions to it have been before tax for its 20 year life).

Suppose it is invested in a Wellesley fund and the quarterly dividends and annual capital gains go into a VG MM fund within the IRA and are then withdrawn as a distribution each quarter. Will it be taxed as regular income? - no consideration if the dividends are qualified or if the capital gains are long or short term.

Similarly if the contents are invested in a VG total stock mkt fund and once a quarter I sell some shares into a VG MM fund within the IRA and then withdraw the proceeds as a distribution each quarter. Will it be taxed as regular income? - no consideration if the capital gains are long or short term.

I would think that since the money that initially went into the 401k was before income taxes, then all the money that comes out of the IRA are taxed at the marginal income tax rate of the owner regardless of how much of it was the result of capital gains etc.

Alan,
I think you have your answer and I was confused by your need to identify dividends in the IRA.

It is simple: if you move money from an T-IRA to your taxable account money market, you pay taxes on the entire amount. It doesn't matter if its interest, dividends, or a reduction in your original principle -- you pay taxes on it -- as long as the initial deposit went in pre-tax.

Some of us however, chose to continue contributing to a T-IRA (before there was a Roth option and before Ed Slott said 'Set up Separate Accounts') with post-tax $.

In that case, the wrinkle on any distribution is whether the entire account is pre-tax (deposits were made before taxes were collected), or the account is post-tax (deposits were made after taxes). In pre-tax, everything is subject to regular income tax. In post tax you have to identify the proportionate share of the account on which taxes have already been paid, so you don't pay them again.

You don't have that situation.

 

[Ed_The_Gypsy]

Alan,

Thank you for the link to The Retirement Pros web site. I downloaded the pdf on SS and am reading it now.

I am skimming (my wife hates that) this thread just now and may have missed something.

I have been skimming The Retirement Pros web site also just now and notice that they emphasize fixed annuities and insist they are without risk.

I know this has been discussed ad nauseum, but people need to know that is simply not true. There are new readers who may not have read earlier threads, so it bears repeating. Just for example, years ago, Baldwin United defaulted on their annuities. Also years ago, there was an annuity company (I forget the name) that was chosen by Reading and Bates ("an inconsequential S&P 500 company" at the time) for their defined benefit pensions because they were the lowest-cost provider who could not support the promised payout and most of R&B's retirees lost something like 30% of their pension. The court ruled that, while things did not turn out well, R&B had acted properly as a "prudent man" and was not liable for the difference. However, when sued by individuals, they settled with those individuals--and only the ones who sued, not a class-action.

This is quite separate from the argument that an individual could do better because everyone has access to similar investments and insurance companies still have to make a profit, reducing your payout.

On the positive side, I am sure that most annuities are safe. I do feel that one should understand that there is some risk, however. There are alternatives, which The Retirement Pros do discuss also.

The prospect of [hopefully] predictable payouts when I can no longer manage my own affairs may drive me to buying one or more annuities. I have seen enough friends and family in such condition to be a warning to myself. Time will tell. YMMV.

 

[Alan]

You're welcome Ed.

If I didn't have private company pensions I would definitely consider SPIA's, and, like my 4 pensions, I would diversify as best as I could, and choose top rated insurance comapnies. (my pensions were not planned or by choice, it just happened that way and 2 of them are from previous employers in the UK so are subject to currency variations).

 

[kaneohe]

Just to confirm what I think you mean by:

The same would be true of a Roth - no taxes on withdrawals whether it be dividends or capital gains It is true that all withdrawals from a Roth are (currently) free of income tax, there is no distinction between original funds, or earnings/gains.

-- Rita

I don't think this is quite true. There are age and "5 yr clocks" that affect the answer. Here's a very useful table I found at fairmark.com

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM

Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes ;Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.