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Tax consideration for taxable, IRA & SS revenue streams
Old 11-09-2010, 12:59 PM   #1
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Tax consideration for taxable, IRA & SS revenue streams

I saw this thread over at the bogleheads forum and think it is very relevant to us.
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This is the direct download to a PDF report titled, "The Guide To Social Security - Higher Lifetime Benefits & Lower Lifetime Taxes". It is put out by 'The Retirement Pros', with whom I don't have any affiliation.

This is a GREAT read to understand the 3 buckets of money you have: qualified money, un-qualified money & social security and when to use each one.
Here's a direct link to the report.

It contains strategies for the order in which you should tap SS, IRAs & taxable accounts. Very good read & they have tried to simplify a very complex subject. Even then, I had to re-read sections in order to understand it.
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Old 11-09-2010, 03:48 PM   #2
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Thank you for this Post.
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Old 11-09-2010, 04:13 PM   #3
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Thank you for this Post.
+1. I am reading it now.
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Old 11-09-2010, 04:25 PM   #4
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Conventional wisdom says to delay the use of your qualified money as long as possible in retirement because it grows faster due to the tax deferral. Generally, the conventional wisdom is wrong. The millions who have heeded this inappropriate advice will have less after-tax money to support them in retirement. This Guide will show you that qualified money should be used first so you can delay taking Social Security benefits as long as possible. There are also tax advantages to using your non-qualified money last in retirement. This timing can give you more after-tax income in retirement and a better lifestyle. If you’ve already started your Social Security benefits and doing so was a mistake, you’ll learn how to undo your error and start over.
Good! I like his logic and agree with what he is saying.

Of course, the issue of when to take SS will be argued back and forth forever, as it has been in the past. If we ever figure it out, we can start on the issue of paying off a mortgage or not.
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Old 11-09-2010, 05:05 PM   #5
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Good! I like his logic and agree with what he is saying.

Of course, the issue of when to take SS will be argued back and forth forever, as it has been in the past. If we ever figure it out, we can start on the issue of paying off a mortgage or not.
I also agree with this. With both taxable and tax deferred accounts, it makes sense for my particular case.

The IRA is full of bond funds, to shelter that otherwise taxable income. It just doesn't grow that fast.

I can make those IRA withdrawals while in an extremely low bracket, and not have to worry about the withdrawals making more of SS payments taxable. Once exhausted, when I reach the point where I can get the maximum SS payment, I'll apply for and tap that, supplementing the SS income with my regular stock and muni bond fund dividends from the taxable accounts, and perhaps sell off some high gainers for additional cash if needed.

This means that my estate is not likely to include an IRA, with all the weird and wonky requirements that would leave to my heirs. One less headache.

Of course, tax law and policies could change. I'll worry about that when or if it happens. I'm pretty sure big taxable accounts will be safe, as that's what many of the big campaign contributors have.
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Old 11-09-2010, 06:17 PM   #6
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Interesting article - thanks very much for sharing. I was talking with DW about this today over breakfast. We have already pretty well decided that she should take her SS at 62 while I leave mine until age 70. At 65 I have another pension from a previous employer due to start and I was telling her we need to start "consuming" our tax deferred IRA's to make as much use as possible of the tax bands from this point on via rollovers to Roths.

Between us we have a lot in TIRA and SEPIRA money, particularly since she had a few years self employed and then her last employer replaced their DB pension with a cash balance scheme that she took as a lump sum rolled over into an IRA plus the 401(k) from that employer. I also have my 401(k) money from my last employer which I will roll over in January.
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Old 11-09-2010, 09:14 PM   #7
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Thanks for posting this over here, Walkinwood. I find it very difficult to read the Bogleheads board because of its ancient software features and the huge number of posts.

Am I understanding the page 9-10 scenarios correctly? The earliest I could start SS would be 2022 so there could be quite a few program changes before then. But assuming today's rules:

My spouse is one year younger. We have essentially equal earnings records and, because of ER and low earnings, projected benefits of about $1000/month starting at age 62. Both of us have the goal of living extremely long lives and we expect to be genetically & physically healthy enough to reach breakeven.

But this paragraph at the bottom of page 10 caught my eye:
Quote:
Also, the spouse that is postponing benefits may be able to file for benefits as the dependent of the other spouse and draw spousal benefits during the period of postponement. Once the age is reached when postponement ends, the dependent spouse can file for benefits based on their own earnings record. This means that a postponing spouse will be able to draw some benefits during postponement and still get higher benefits once they claim regular benefits based on their own earnings record.
This seems to imply that I could file/suspend as soon as I turn age 62 (not drawing any benefits). A year later when spouse turns age 62 she could then file, "postpone" the benefits of her own earnings record, and start drawing $500/month spousal benefits based on my earnings record (bottom of page 9). She could continue this $6000/year practice until she turns age 70, at which point she could stop spousal-benefits withdrawals and start withdrawing her maximum benefit for her own earnings record. Along the way when I turn age 70 I'd start drawing my own max benefits from my own earnings record.

Am I interpreting this correctly? Is this the way the system is really intended to work? Spouse could hypothetically withdraw $48K of "free" benefits over an eight-year period with no reduced benefits to her own earnings record?

She'll be receiving her own Navy Reserve pension at age 60, so any SS benefits would be maximally taxed even before considering other income. We've already completed her Roth IRA conversion so she doesn't need to touch that. But even after paying extra taxes it seems to make sense for her to take the spousal benefits between ages 62-70.
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Old 11-09-2010, 09:37 PM   #8
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Am I interpreting this correctly? Is this the way the system is really intended to work? Spouse could hypothetically withdraw $48K of "free" benefits over an eight-year period with no reduced benefits to her own earnings record?

Retirement Planner: Benefits for your spouse
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Old 11-09-2010, 10:09 PM   #9
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Well, thanks for the reference, but that's why I'm asking all of these dumb questions. I thought I already knew "the rules" and Smith seems to be expanding on them. The SS website seems to imply that both spouse and I would have to be "full retirement age" (age 67 for us) before she could draw any spousal benefits.
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Even if he or she has never worked under Social Security, your spouse:
...
* can receive a benefit equal to one-half of your full retirement amount if they start receiving benefits at their full retirement age.
Quote:
If you are full retirement age, you can apply for retirement benefits and then request to have payments suspended. That way, your spouse can receive a spouse's benefit and you can continue to earn delayed retirement credits until age 70.
If your spouse has reached full retirement age and is eligible for a spouse's benefit and his or her own retirement benefit, he or she has a choice. Your spouse can choose to receive only the spouse's benefit now and delay receiving retirement benefits until a later date.
This would imply that either (1) she can't start the spousal benefits until I turn 67, which would give her four years of $6K/year, or (2) she can't start the spousal benefits until she turns 67, which gives her three years of $6K/year.

So reading Smith's PDF again, he does say:
Quote:
The dependent spouse can start benefits as early as age 62 if the other spouse has started benefits and/or has reached normal retirement age.
If I "file and suspend" at age 62, is that the same as "started benefits"? WTF is "normal retirement age"?!? "Full" or "age 62" or age 65? Either Smith doesn't know what he's talking about, or SS has changed the rules since he published his PDF, or it's way more complicated than either reference seems to imply.
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Old 11-10-2010, 08:06 AM   #10
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But this paragraph at the bottom of page 10 caught my eye:

This seems to imply that I could file/suspend as soon as I turn age 62 (not drawing any benefits). A year later when spouse turns age 62 she could then file, "postpone" the benefits of her own earnings record, and start drawing $500/month spousal benefits based on my earnings record (bottom of page 9). She could continue this $6000/year practice until she turns age 70, at which point she could stop spousal-benefits withdrawals and start withdrawing her maximum benefit for her own earnings record. Along the way when I turn age 70 I'd start drawing my own max benefits from my own earnings record.
That's the interpretation that I have too, with one difference. My reading was that your spouse would get 50% of your benefit at 62 - not your full retirement benefit - for the years until she claimed her own benefit. I was unaware of this till I read the article yesterday.
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Old 11-10-2010, 08:23 AM   #11
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I thought I understood all this until I read the article and the posts. Now I am back to confused. In my case, my wife is retired and over 62, but hopefully will not draw her beneifts until 66. I am still working, so even though I am over 62, I am not drawing any SS. My benefits will be significantly smaller than my wife's due to pension offset rule. Can I file and suspend and then have her draw half of my SS even though I am still working? It won't be a lot, but $ are $. That's where I am lost. I thought this could not be done if I was still working (and maybe it can't). Once I retire, even though I will be under 66, I'll start mine immediatley and I would have my wife start her 50% spousal benefit while letting her benefit build at 8% a year.

I'm not sure I am making sense even to myself. If I could remember what a quadratic equation was, this seems more complex .
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Old 11-10-2010, 09:14 AM   #12
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I'll read the report, but suspect that when I'm eligible for the 'reduced' SS benefits (of which I believe it will be about what Nords is projecting....or much less), SS will certainly not be what it is now - gotta wait a good 16 years to 62. You guys will have this figured out by next month, I'm sure. :-)
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Old 11-10-2010, 09:33 AM   #13
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When I try to go to the link to Smith's PDF file I get nothing. Is it possible that he pulled the paper? Are you guys able to access the link?
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Old 11-10-2010, 09:36 AM   #14
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It still works. I saved it to my hard drive and can e-mail it to you, if you want. Please send me a PM if you want me to send it.
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Old 11-10-2010, 09:48 AM   #15
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I read this paper and I think it is helpful. However, as another poster has pointed out, everything depends on one's individual circumstances. In years of retirement I have never tapped any cash source other than interest, dividends, and trading profits in taxable accounts.

In late 2008 I did start SS, and looking back it would have been optimal to tap cash balances in my IRA instead of SS. However I have since paid SS back and reset my clock.

I pay more tax than I would like, but overall I believe that is the price of success. Return of capital will always be cheaper taxwise, but is that good?

I do think that the SS withdrawal strategies for married couples represent a true free lunch. Also, I think that the only single women who should not wait until age 70 to start SS are those who are mortally ill, or those who have immediate need for the cash flow. Even illness should be carefully evaluated. I notice that Jill Clayburgh survived 20 years with chronic lymphocytic lymphoma.

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Old 11-10-2010, 12:20 PM   #16
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A quote from the linked page:
"If your spouse worked
If your spouse is eligible for retirement benefits on his or her own record we will pay that amount first. But if the benefit on your record is a higher amount, he or she will get a combination of benefits that equals that higher amount (reduced for age).

It doesn't matter if your spouse starts getting benefits before, after, or at the same time you do--we will check both records to make sure your spouse gets the higher amount."

My interpretation is there is no "spousal free ride".
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Old 11-10-2010, 01:58 PM   #17
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A lot has been said about married couples but everybody seems to forget the widows and widowers . We can collect survivor benefits starting at 60 and then switch to our own benefit at a later date .
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Old 11-10-2010, 02:20 PM   #18
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A lot has been said about married couples but everybody seems to forget the widows and widowers . We can collect survivor benefits starting at 60 and then switch to our own benefit at a later date .
A good opportunity.
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Old 11-10-2010, 02:32 PM   #19
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I find it very difficult to read the Bogleheads board because of its ancient software features and the huge number of posts.
Nords, there is another viewer available for the Bogleheads forum. It is formatted just like this one. The link is: Bogleheads :: Index
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Old 11-10-2010, 02:42 PM   #20
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The paper on taking tax deferred money first is in conflict with the results I get from running the i-orp retirement planning software (ORP has us taking taxable assets first). I also used the same scenario as the paper which stated 'delay SS as late as possible'.

It was my understanding the ORP software optimized withdrawals for tax purposes so now I'm a bit confused as to which is the better strategy.
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