401k and Roths to cover gap years

[pb4uski]

+1 I certainly would not base my tax-deferral strategy on something as unlikely as a consumption tax when there are much more likely alternatives.

 

[growerVon]

For the OP, another strategy for covering until 59.5 (or 55 if you have a 401k with such a retirement feature included) is to planfully employ a SEPP on your IRA funds. SEPP == Substantially Equal Periodic Payments and is also referred to as the 72-T rule, due to where it is defined in the IRS tax codes. A SEPP entails prescribing a fixed amount to be distributed, and not deviated from, annually from an IRA until 59.5 at which time the SEPP can be broken (I believe). No contributions can be made to a SEPP'd IRA and there are other rules as well as steep penalties for getting this wrong. Definitely something to be undertaken only after close planning, but it is a way to get at some of that Traditional IRA and/or 401k money you may have squirreled away before the age of 59.5 (or 55 for 401k plans with that early access feature).

 

[Senator]

+1 I certainly would not base my tax-deferral strategy on something as unlikely as a consumption tax when there are much more likely alternatives.

Very true. A dollar devaluation might be more likely...

 

[Ed_The_Gypsy]

We have no taxable assets. Our case is very simple. I suspect we are not alone.

Sent from my SM-G900V using Early Retirement Forum mobile app

 

[bUU]

LTCG and Q-divys are not taxable until you exceed the 15% bracket.

I've heard similar advice elsewhere - use taxable first, then tax deferred, then tax free (Roth) in that order. I think the intention is to defer taxes as long as possible and preserve tax free money most of all. But I agree that this logic is too simple and needs to be adapted based on sizes of accounts and the possibility of RMD (and SS) causing a big tax in later years.

I suppose if RMDs later in life could shift one into the 28% or 33% tax brackets, then it does make sense to consider filling the 25% tax bracket earlier in retirement, even though it boosts the capital gains tax rate. However, I need to understand a bit more about that. If you're $1 over the limit into the 25% tax bracket, do all your LTCG get taxed at 15%. (I think so.) As such, I think it would be really hard to find a scenario where one does have significant taxable investments and could do much better than the "simple" approach of filing the 15% tax bracket as long as you're able. Perhaps an example with numbers will help make the point clearer?

 

[Animorph]

I suppose if RMDs later in life could shift one into the 28% or 33% tax brackets, then it does make sense to consider filling the 25% tax bracket earlier in retirement, even though it boosts the capital gains tax rate. However, I need to understand a bit more about that. If you're $1 over the limit into the 25% tax bracket, do all your LTCG get taxed at 15%. (I think so.) As such, I think it would be really hard to find a scenario where one does have significant taxable investments and could do much better than the "simple" approach of filing the 15% tax bracket as long as you're able. Perhaps an example with numbers will help make the point clearer?

I've definitely modeled it both ways for my case. My calculations showed I could spend more by Roth converting up to about the AMT level now, well into the 25% bracket, even though I'm living off my taxable accounts and could fit that within the 15% tax bracket with 0% capital gains. I do avoid 25% income tax later when I hit 70.

For the 15% 0% LTCG "bracket", both income and CG's must fit within the 15% tax bracket. If you add $1 of income after it's full, that $1 is taxed 15% and $1 of CG now falls outside the bracket and is taxed at 15%. That's the 30% marginal tax rate that has been discussed on the forum before. If you add $1 of CG after the tax bracket is full you just owe 15% of that $1 for taxes. There is not a case where $1 over the bracket causes all CG's (>$1) to be taxed.

 

[rayvt]

However, I need to understand a bit more about that. If you're $1 over the limit into the 25% tax bracket, do all your LTCG get taxed at 15%. (I think so.)

No, it doesn't. I used to think so, a long time ago, but an expert set me straight.

That portion of your LTCG & dividends that falls into the 15% bracket is not taxed. Only the porttion that is in the 25%+ bracket(s) get taxed.

Add up all your income *except* LTCG and dividends. The difference between that and the top of the 15% bracket is the amount of CG & div that is not taxed.

Example: for 2015, filing as MFJ, pension, SS, STCG, interest, deductions, etc. netting to $40,000, you can have $34,900 ($74, 900 - $40,000) of LTCG & dividends that are not taxed. If you have $35,900, you pay LTCG/div tax on $1,000. 15% of $1000 = $150.

 

[kaneohe]

No, it doesn't. I used to think so, a long time ago, but an expert set me straight.

That portion of your LTCG & dividends that falls into the 15% bracket is not taxed. Only the porttion that is in the 25%+ bracket(s) get taxed.

Add up all your income *except* LTCG and dividends and then subtract deductions/exemptions/adjustments. The difference between that and the top of the 15% bracket is the amount of CG & div that is not taxed.

Example: for 2015, filing as MFJ, pension, SS, STCG, interest, deductions,exemptions,adjustments etc. netting to $40,000, you can have $34,900 ($74, 900 - $40,000) of LTCG & dividends that are not taxed. If you have $35,900, you pay LTCG/div tax on $1,000. 15% of $1000 = $150.

I can tell that you know your stuff but I think your brain was going a million mph and left a few words behind. I added a few words above to clarify .

 

[bingybear]

I suppose if RMDs later in life could shift one into the 28% or 33% tax brackets, then it does make sense to consider filling the 25% tax bracket earlier in retirement, even though it boosts the capital gains tax rate. However, I need to understand a bit more about that. If you're $1 over the limit into the 25% tax bracket, do all your LTCG get taxed at 15%. (I think so.) As such, I think it would be really hard to find a scenario where one does have significant taxable investments and could do much better than the "simple" approach of filing the 15% tax bracket as long as you're able. Perhaps an example with numbers will help make the point clearer?

Yes this is possible for some situations. But one with Q-divys and LTCG will also start paying a 30% marginal rate when they exceed the 15% bracket (--- tax on each $ of new ordinary income, STCG, NQ-divy (at the 15% bracket + 15% of the LTCG/Qdivy that is pushed out of the 15% bracket.) So the benefit really has to be weighed on the individual case as you could be paying more tax now than later based on local marginal rates.