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

[cathy63]

Ok, I've been doing some researching while waiting for the time I can start calling. I may have found a tax professional in my own town that has a good reputation (yay!)

I still don't understand one thing - if we roll our Vanguard 403b into a Roth, is it the same plan (the VANGUARD INSTL TARGET RET 2020 FUND) with the same growth rate and risk rate, just with different tax implications? I can't seem to find an answer for this question. I've looked around the Vanguard site, too, but if the answer is there, I can't find it.

I feel pretty safe with this Vanguard account that we have, and am cautious about changing it.

The "INSTL" in "VANGUARD INSTL TARGET RET 2020 FUND" is short for "Institutional", meaning you can only own it in an employer's plan. If you roll the account over to a Traditional or Roth IRA, then they will probably* liquidate this fund and you would then reinvest in a similar fund that's open to individual investors. "Vanguard Target Retirement 2020 Fund (VTWNX)" should be pretty much the same fund, but for individuals.

* If both accounts are held at Vanguard, then it's possible they might allow you to keep the institutional shares. You'd have to ask them.

 

[CindyBlue]

Normally I'd say yes, but for your own Roth I don't know that you can roll an "Institutional" fund over. It might get changed to "Vanguard Target Retirement 2020 Fund (VTWNX)", which is essentially the same but with a slightly higher internal fee.

Thank you!

I've sent a message to Vanguard asking them this question, too - hoping they will answer!

 

[CindyBlue]

The "INSTL" in "VANGUARD INSTL TARGET RET 2020 FUND" is short for "Institutional", meaning you can only own it in an employer's plan. If you roll the account over to a Traditional or Roth IRA, then they will probably* liquidate this fund and you would then reinvest in a similar fund that's open to individual investors. "Vanguard Target Retirement 2020 Fund (VTWNX)" should be pretty much the same fund, but for individuals.

* If both accounts are held at Vanguard, then it's possible they might allow you to keep the institutional shares. You'd have to ask them.

Thank you!

Both accounts are at Vanguard.

When you say "you would then invest in a similar fund?" does that meant that Vanguard will do this (invest in a similar (Roth) fund) for us? Do I have to tell them exactly what to do? Because I don't think I know enough to tell them what to do - as you can see, I know nothing about this!

And...is this the kind of question that a financial advisor would be able to anwer? Or a tax advisor? Can I pay a financial advisor or tax advisor to do this rollover for us so we don't screw it up?

 

[CindyBlue]

Google "registered fiduciary near me". Scroll past the hits marked Ad down to the "People also ask" questions. That's where you will learn worthwhile things, besides here, of course. The section expands with more questions and answers the more you click on them. I think the SEC has a tool to find advisers and fiduciaries.

Thank you!

Off to do this now!

 

[rothlev]

Thank you!
I have tried to find a fee-based financial advisor for years, and they just seem to be in hiding. How does one find one? We really don't know anyone to ask.

Our tax lady (obviously) knows our income sources. She suggested this year that, since my Soc Sec was added to our income just this past April, that we each submit a form to have 7% taken out of each of our Soc Sec checks each month. Is that what you meant about the kind of information/advice that a tax professional can give us?

It is a pay now or pay later question. Run hypothetical withdrawals with your tax lady. All pre tax money 401k, and 403b withdrawals are taxed at ordinary income rates. Once RMD's kick in and you have social security income , not much you can do about it.

 

[OldShooter]

@CindyBlue, let me offer a caution: A single goal to minimize taxes is actually relatively easy to achieve. Convert everything to cash and store it in a buried can in the back yard. The problem, of course, is that this also minimizes income.

Do not let the tax tail wag the investment dog. Your DH's goal and yours should be to maximize your net worth after taxes are paid. If you end up with more money and also end up paying some taxes along the way, so what? The important goal is more money, not minimum taxes.

 

[ivinsfan]

Thank you!
Edited to add: All of these are 40 or more miles away in lousy traffic...sigh... We don't really want to have to drive that far, but understand that we might have to...

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 per hour 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

 

[Scrapr]

Cindy

You may want to expand your search area for a Financial planner. I would bet they could do a Zoom call. Send them your info & they can share the screen with you. And email back action items

 

[ivinsfan]

It is a pay now or pay later question. Run hypothetical withdrawals with your tax lady. All pre tax money 401k, and 403b withdrawals are taxed at ordinary income rates. Once RMD's kick in and you have social security income , not much you can do about it.

Exactly, the OP taking SS this April, is a hindrance in trying to reduce taxes. These aren't last minute spur of the moments decisions.

 

[ivinsfan]

Thank you!

Both accounts are at Vanguard.

When you say "you would then invest in a similar fund?" does that meant that Vanguard will do this (invest in a similar (Roth) fund) for us? Do I have to tell them exactly what to do? Because I don't think I know enough to tell them what to do - as you can see, I know nothing about this!

And...is this the kind of question that a financial advisor would be able to anwer? Or a tax advisor? Can I pay a financial advisor or tax advisor to do this rollover for us so we don't screw it up?

This is your best comment so far, you free admit you don't know this and from what you say your DH knows even less.


Just cool your jets until you BOTH know more. You are nowhere near ready to be asking someone to do a rollover.

 

[TheWizard]

I don't see specific numbers from the OP.
General procedure for minimizing income taxes is to avoid large variations in Adjusted Gross Income from the years before and then after age 70-72.

I call this Levelizing your AGI; use Roth conversions in your years prior to 72 to do this. With proper planning, you should be able to keep annual increases in AGI to less than 5% per year, no big jumps.

And for couples with a healthy investment portfolio, another idea is to set up any pensions or payout annuities to be single life, not joint.
This tends to keep the eventual surviving spouse from getting into a much higher tax bracket.

Edit: it appears that the OP and spouse are late to the game of learning financial and tax details for retirement money management; time to do this is maybe five years prior to retirement of the first spouse, if not sooner.
So I would connect with a proper financial planner, but also take OldShooter's advice to focus on net income, not letting taxes wag the dog...

 

[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.

 

[TheWizard]

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.

Right.
And we do NOT want the OP to put any of their combined assets under management of someone like that...

 

[ivinsfan]

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.

A great point and I went and edited my comment to the OP to include hourly fee based planner...the difference is crucial and we don't want her confusing the two types.

 

[pb4uski]

....we won't have to pay as much taxes later when we are older (not sure I quite understand this but that's what he said.)

I told him I'd ask you folks.

What specifically makes him thnk that you'll have to pay more taxes later?

 

[CindyBlue]

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]

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.

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.

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]

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]

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]

..... 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]

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]

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?