Max out 401k just prior to ER?

[kaneohe]

mj107.......new info from fairmark.com pro.

I knew that if you had a Roth consisting of just contributions and earnings (no conversions) you could withdraw the RMDs after the owner's death and not pay a penalty because the RMD is about 4% at age 70 and there is no way you could withdraw enough to start withdrawing earnings (contributions come out first) if the Roth was not yet 5 yrs old and you were only taking RMDs.

I was worried that if you started the first Roth w/ a conversion and the death of owner occurred shortly thereafter, the 5 yr clock for Roth conversion would cause a penalty on RMDs because they were considered to be from the conversion. However, this link suggests that
the 5 yr clock for Roth conversions is cancelled by the owner's death...
(for the conversion part only). The clock continues for earnings. However if the beneficiary is only withdrawing RMDs, again there is no way to withdraw enough to start withdrawing earnings (the conversion amount comes out first) within the first 5 yrs. Hopefully this makes sense......it's a bit complex.

Fairmark Forum :: Retirement Savings and Benefits :: Inherited Roth.....RMDs & 10% penalty

 

[mathjak107]

thats how i interpret it too. thats why its important the kids know to check how old the roth is.... if they elect lifetime payments the payments would probley be small enough so no earnings were taken out on a roth less then 5 years old . however if they went for the 5 year withdrawl so much would come out they are likley to pull earnings and get taxed

 

[mathjak107]

i started reading ed slotts book. some pretty cool ideas in the book.

if you have a tradional ira thats will be taxable and faced with rmd's what you can do is instead of leaving your wife as beneficiary leave your kids as beneficiary... lets say you have a tira worth 500k... leave your kids as beneficiary instead of your wife... with some of the money from the ira buy a life insurance policy on yourself for 500k... at your death your wife gets to keep 500k tax free in life insurance, the kids get to take withdrawls over their lifetimes of the ira money allowing it to grow and producing much smaller taxable amounts over their life time then your wifes would have been.



or take some of the rmd's and leverage that money big time by buying a life insurance policy on yourself with the kids as owners. give them a gift of the money each year to pay the policy... at your death they will get a tax free pay off far above what the policy probly cost and it passes outside your estate.

 

[kaneohe]

It's been a while since I read his books so I don't remember any of the details. I wonder how the math works out if you don't qualify for the very best rates due to medical reasons. I assume this is whole life since you might live forever and term rates would become absurdly high or perhaps you couldn't keep the term forever?

 

[mathjak107]

im sure not being healthy would raise the rates but in the book he talked about an elderly couple who both were very ill and it paid for both of them to take life insurance and companies did pick them up....

all things being equal the smart thing is set this up while your healthy

 

[harley]

I think the implication is that you would set up the term life policy while still young enough to qualify (60ish). You should be able to get a 20 year term life policy at that age without breaking the bank, unless you are already very ill. If you outlive it, you'd probably only need a shorter term but much more expensive policy after that. No matter what, it's pretty much guaranteed to be cheaper than the taxes.

Ed Slott's ideas will work for the majority of people who need to try to minimize estate and inheritence taxes, but nothing works for everybody. I've been reading his books over time, and plan to implement some of his ideas. It's on the to-do list (item #673).

 

[mathjak107]

so the question is does conventional planning still apply with a roth conversion.. normally we keep our biggest growing asset (hopefully ) our stocks and stock funds in our taxable account where they get special capital gains treatment and what ever is left the kids get a stepped up basis on and get tax free... our income producing stuff normally goes in the tradional ira's and 401k...

but now im thinking maybe thats wrong .. maybe the biggest gaining stuff should be in the roth where there is no chance id have to sell it and pay a tax or pay taxes on distributions every year and let that run totaly tax free..

im not sure the compounding on the income stuff in the roth would make the price of conversion the best deal.... its like the tax free compounding would be wasted on money that will be growing the least namely the bonds, bond funds , cd's etc by conventional planning rules.

im confused now.

 

[kaneohe]

I guess I'm going to have to check out Ed Slott's book for a second look.

Harley.......like many things financial, the devil is in the spreadsheet. Your post made me realize that I must have misplaced/lost a letter from USAA
concerning my 10 yr level term (longest they would give me). For 100K,
premiums are $754/yr for 10 yrs then they jump to ? I forget exactly but in the range of 13-31K/yr. (I found it: 34K+ in yr 11) I'm not sure how that works out if you live a long time. That's why I was thinking the strategy might have been for whole life. I don't know if term goes forever but it would be a shame to embark on this strategy (life insurance) and not go to completion bc the policy ended....either because it couldn't be renewed or because it was too expensive. Again, all in the numbers. As for myself, I know I have have a hard time parting with a big hunk of $$$ , at one time and even more if it was every yr and getting higher each time.........like buying an immediate annuity or redoing SS at 70.

MJ107.........I guess it depends whether you're a turtle or a hare; or a theorist or an experimentalist. I've been continually surprised looking at fund results......usually they go 1,5,10yr, life of fund..........esp. the 10 yr that covers the little bumps in the 2000 bubble and the more recent one.
Until recently the 10 yr returns on many were negative and even the more recent ones often didn't beat a CD. Yeah, I remember some long term equity return of 10% from some period I don't remember but you know that fine print about the past returns not being a guarantee of the future.
Maybe you want to go half and half as a hedge?

 

[mathjak107]

YEP , the return on stocks has been dismal the last decade, thankfully im very well diversified and actually am still running a 9% long term average the last decade... in fact my mix of 25% total market index fund, 25% long term treasurys, 25% cash and 25% gold did rather well. i was up last year about 5% as tresuries took off and were up 28% . that plus the gold excceded the stock loses...

but overall that mix did well for decades averaging over 9% now for decades ... never a barn burner in the up markets but makes it all up in the drops.

the key was rebalancing, all the while gold was doing nothing my rebalancing forced me to buy more and more over the decades. finally when gold had its day in the sun and was back on the radar as an investment it worked out great

 

[kaneohe]

MJ107....sounds like you have great discipline. I did the gold thing for awhile but it seems like it went to sleep or maybe even declined for a long time so I stopped. Congrats to you for staying the course. Is that a heavier than conventional weighting?

 

[mathjak107]

found the answer somewhat in eds book.

structure things so first to go money is the pure taxable stuff, next the defered ira stuff, next capital gains taxable stuff and last roth stuff.

its not so much the asset class as it is when will the money be needed and the tax status of the item....