DH concerned about taxes...what to do...

[CindyBlue]

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Originally Posted by ivinsfan You're not going to get what you need from us while sitting in front of your computer. I don't think you or your DH have any idea of the scope of knowledge you need here to "try and lower your taxes" . There are too many pitfalls and areas where you can hurt yourself. For example if you were serious about saving taxes you would have let your own SS continue to grow risk free and done Roth conversion(if possible) until you turned 70. Find a fee based guy, tell him your main area of concern and get together all the paperwork he tells you bring along. That's your first step, until then you are just spinning your wheels. Don't get discouraged I can tell you are a smart lady, but people don't know what they don't know. Maybe the comment about taxes was just a one off by your DH and it won't go any farther. Good luck

Ivinsfan, thank you! I've read all your responses, and everyone else's, and also read them to my husband, and we had a long talk. He has clarified his concern to the idea of making more money rather than focusing on taxes.

He now states that he wants to know what to do with the Vanguard RMD since we don't need it (yet!) to live on - so far our Soc Sec checks and small pension checks are paying the bills. He was thinking that he could put the RMD from Vanguard directly into the Vanguard Roth instead of taking it out (thus the original comments I made about Roth conversions, which I think is a different thing entirely.)

So now the concern seems to be what to do with excess money.

1. Can we transfer RMD money directly from the Vanguard 403b account to the Vanguard Roth account? (I have a message in to Vanguard about this.)
2. Are we even allowed to add to our Roth at all, now that we are retired?
3. Should we (can we?) set up a yearly 403b rollover to the Roth account even if we can't roll the RMD money directly into it (i.e., separately from the RMD money?)

It's getting clearer...

[CindyBlue]

"...but people don't know what they don't know."

This is a great statement, and exactly what my situation is. Thank goodness I have you folks here to help me clarify what it is I don't know. The patience of everyone is amazing, as I try to figure out what to ask and, from your responses, figure out what I should know!

I am very grateful!

[cathy63]

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Originally Posted by CindyBlue So now the concern seems to be what to do with excess money. 1. Can we transfer RMD money directly from the Vanguard 403b account to the Vanguard Roth account? (I have a message in to Vanguard about this.)

No, you cannot. A Required Minimum Distribution cannot be rolled into another retirement account. If you donate to charity, you can use the RMD to make a Qualified Charitable Distribution and avoid paying taxes on it that way, but otherwise, it will just become part of your taxable ordinary income for the year.

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Originally Posted by CindyBlue 2. Are we even allowed to add to our Roth at all, now that we are retired?

If one of you still has some earned income from work, even part-time or consulting work, you can contribute to both of your Roth IRAs (IRAs are Individual accounts, so you don't have an "our Roth". It belongs to one or the other of you, or maybe you each have your own). If neither of you is earning money, then you can't make a Roth IRA contribution, but you can still do a conversion.

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Originally Posted by CindyBlue 3. Should we (can we?) set up a yearly 403b rollover to the Roth account even if we can't roll the RMD money directly into it (i.e., separately from the RMD money?) It's getting clearer...

I don't think Vanguard offers any kind of automatic yearly Roth conversion. You would need to contact them every year and say that you want to convert $X from your 403b to your Roth IRA.

[Sunset]

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Originally Posted by cathy63 No, you cannot. A Required Minimum Distribution cannot be rolled into another retirement account..... If one of you still has some earned income from work, even part-time or consulting work, you can contribute to both of your Roth IRAs (IRAs are Individual accounts, so you don't have an "our Roth". It belongs to one or the other of you, or maybe you each have your own). If neither of you is earning money, then you can't make a Roth IRA contribution, but you can still do a conversion. .....

And for OP - the important thing, is a roth conversion can only be done after (in addition) to the RMD amount.
If you have an RMD of $23,000 , then to do a roth conversion one needs to take out the RMD plus extra money and only the extra money can be converted.

[ivinsfan]

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Originally Posted by Sunset And for OP - the important thing, is a roth conversion can only be done after (in addition) to the RMD amount. If you have an RMD of $23,000 , then to do a roth conversion one needs to take out the RMD plus extra money and only the extra money can be converted.

The devil is all in the details, isn't it and there are a lot of details..


Frankly if I was the OP I'd put the RMD money after taxes into the market in a taxable account..

[Sunset]

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Originally Posted by CindyBlue ..... and we had a long talk. He has clarified his concern to the idea of making more money rather than focusing on taxes. He now states that he wants to know what to do with the Vanguard RMD since we don't need it (yet!) to live on -....... So now the concern seems to be what to do with excess money. ....

You can have/open a regular Vanguard account, put the money in there, and buy nearly the same Vanguard fund, or any other fund.

IF you wanted to avoid declaring extra income (means a little more taxes) you could buy a tax efficient fund/ETF/Stock.

My personal favorites are: VTI (a Vanguard ETF), and BRK.B (Berkshire does not pay any dividend, so you only pay taxes on capital gain when you sell, it's a relatively safe investment that does ok, composed of a few 100 companies)

<edit> looks like ivinsfan and I were posting at the same time (I'm a slow typer).

[RetiredHappy]

The link which I posted earlier, garrettplanningnetwork.com, the CFPs charge a one time small fee for the initial set up to dig into the details, provide guidance and until implementation. Subsequent hourly fee is charged as desired by the client for the future / years.

[RetiredHappy]

Note to OP,, if it has not been clear feom the earlier posts, you have to pay income tax on any amount that you convert from tax deferred account to a Roth account.

[CindyBlue]

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Originally Posted by Sunset You can have/open a regular Vanguard account, put the money in there, and buy nearly the same Vanguard fund, or any other fund. IF you wanted to avoid declaring extra income (means a little more taxes) you could buy a tax efficient fund/ETF/Stock. My personal favorites are: VTI (a Vanguard ETF), and BRK.B (Berkshire does not pay any dividend, so you only pay taxes on capital gain when you sell, it's a relatively safe investment that does ok, composed of a few 100 companies) <edit> looks like ivinsfan and I were posting at the same time (I'm a slow typer).

Thank you! The idea of opening a "regular" Vanguard account hadn't even occurred to me! Now we have to figure out if we want our money to be very safe or risk it in the market along with our 403b money...

Good grief! This is complicated. I thought I had it all figured out when I retired...

[CindyBlue]

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Originally Posted by RetiredHappy Note to OP,, if it has not been clear feom the earlier posts, you have to pay income tax on any amount that you convert from tax deferred account to a Roth account.

Yep, thank you - that we knew! I guess the question is...pay now or pay later, and what is the advantage of each?

[RetiredHappy]

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Originally Posted by CindyBlue Yep, thank you - that we knew! I guess the question is...pay now or pay later, and what is the advantage of each?

It all depends and none of us can answer that question for you without all the numbers, and a bit of a gamble that one is a better decision than the other.

[harllee]

Cindy, don't know if anyone else has mentioned this but one way to reduce RMD distributions and thereby reduce taxes is to make charitable gifts from your IRA. Any amount you give each year to charity from an IRA after age 70.5 reduces the amount of RMD you have to take from your IRA. Under the tax rules you can do this up to a max of $100,000 per year. So if you are doing any charitable gifts, like to your Church, Red Cross, etc. do them from your husband's IRA instead of from your checking account. There is info on the Vanguard website how to do this. Basically you have Vanguard write a check from your IRA to the charity, send it to you and then you mail it to the charity with a letter that is from you. Then you reduce your RMD by the amounts you gave to charity.

[target2019]

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Originally Posted by CindyBlue Yep, thank you - that we knew! I guess the question is...pay now or pay later, and what is the advantage of each?

What tax bracket are you in now, Cindy?

The tactic is to stay in a lower bracket, pay taxes on a conversion to Roth IRA, and avoid the additional taxes that will come when you enter a higher tax bracket.

[pb4uski]

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Originally Posted by CindyBlue ....1. Can we transfer RMD money directly from the Vanguard 403b account to the Vanguard Roth account? (I have a message in to Vanguard about this.) 2. Are we even allowed to add to our Roth at all, now that we are retired? 3. Should we (can we?) set up a yearly 403b rollover to the Roth account even if we can't roll the RMD money directly into it (i.e., separately from the RMD money?) It's getting clearer...

1. No.
2. If you no longer have any earned income (wages) you can't make contribution to your Roth but you can do conversions (transfer money from 403b to Roth and pay the income tax on the amount transferred).
3. No. But you can transfer the RMD to a taxable brokerage account and invest it however you want... you don't have to spend it. You can invest it in the same type of investment that it was in in the 403b account or something different.

[pb4uski]

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Originally Posted by CindyBlue Yep, thank you - that we knew! I guess the question is...pay now or pay later, and what is the advantage of each?

The conventional advice is to look at your "ultimate" tax bracket... once all pensions and SS are going... as any RMDs would be in that or higher tax brackets. It sounds like you are both collecting SS and any pensions already? If so, then you are probably already in your ultimate tax bracket and might consider Roth conversions in additions to RMDs to the top of that tax bracket.

Another possible consideration is your kids tax bracket since if they inherit the 403b then they'll need to drain it within 10 years and if the heirs are financially successful they may be in an even higher tax bracket.

It's very situational.

[brett]

We worked with a tax professional for several years. The benefits far exceeded the professional fees. Got set up, now we follow the plan on our own. Saved us a fair amount of tax over the past ten years.

[Sunset]

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Originally Posted by CindyBlue ..... The idea of opening a "regular" Vanguard account hadn't even occurred to me! Now we have to figure out if we want our money to be very safe or risk it in the market along with our 403b money... ......

Just remember that pure savings earning interest has a hidden danger called inflation. I have some CD's earning 1% right now, so since inflation is currently around 4% , it means I'm really losing 3% a year in spending power.

So that $100K car today, will cost $104K next year, but my CD will only be worth $101K

If the money is currently "extra" and you don't see that you will need it within a few years, then my personal rule is to invest in the market.
Over any 20 yr span, the market has not lost money, just be diversified.

[CindyBlue]

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Originally Posted by target2019 What tax bracket are you in now, Cindy? The tactic is to stay in a lower bracket, pay taxes on a conversion to Roth IRA, and avoid the additional taxes that will come when you enter a higher tax bracket.

Does this mean marginal and effective tax rates? If so, the marginal is 12% and the effective is 11%. (I mentioned I was ignorant...sigh...)

I'm thinking that the only way it would get higher is when I have to take RMDs in 6 years, right? (unless, God forbid, we start w*rking again (smile!))

[N02L84ER]

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Originally Posted by CindyBlue Does this mean marginal and effective tax rates? If so, the marginal is 12% and the effective is 11%. (I mentioned I was ignorant...sigh...) I'm thinking that the only way it would get higher is when I have to take RMDs in 6 years, right? (unless, God forbid, we start w*rking again (smile!))

or when one of you dies and you have to switch to filing as single instead of married filing jointly.

[OldShooter]

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Originally Posted by RunningBum Just a comment on looking for a "fee based" advisor. A year or two ago I used one of the links someone gave to look for one, mostly out of curiosity. The ones around me all had their fee based on assets under management, not hourly.

That gets confused a lot. In the industry "fee based" is used to differentiate from "commissioned salesperson." The fee can be hourly, by the job (financial plan) or AUM. Those who offer hourly and by the job are typically doing it to develop AUM business from the clients they attract.

Nothing wrong with any of that, but it can be confusing.