ER Tax strategy

[almost there]

So, I got out of the rat race at 52 last summer.
Best move I ever made.
Am now looking at long term options in the Tax arena.

To find out the best moves tax wise, would you ask a CFP or Tax person?

Am thinking about doing a 72t now with my $475k IRA to pull a smaller amount out ($20k) every year to avoid large chunk distributions down the road. Am thinking I should access the money now while staying in a lower tax bracket.
Before SS (62), , and a $400k lump sum or $2200 mo. annuity retirement fund @ (59 1/2) will be available
Plan to let the $120k Roth sit for old age....

What would you do at 53?
Thanks!

 

[pb4uski]

I think you are better to read, learn and do it yourself.

Unless the IRA is your only source of living expenses, I think a better way to accelerate that deferred income in your IRA to your low tax rate years between now and when SS and pensions start is to simply do annual Roth conversions. It is more flexible than a 72t because you can do as little or as much as you want each year and if you accidentally overdo it you can even recharacterize it and reverse it.

I'm currently converting amounts as needed to the top of the 15% tax bracket. My federal tax on last year's Roth conversions was about 5% as I recall which I consider to be a deal given my marginal rate when I deferred that income was 25% or more.

 

[almost there]

Thanks, I had no idea a Roth conversion could be done at such a low rate. 5% sounds like a deal.

 

[brewer12345]

Do you need the money? If not, how about Roth conversions?

 

[pb4uski]

Thanks, I had no idea a Roth conversion could be done at such a low rate. 5% sounds like a deal.

Sketch out your 2014 tax return in TurboTax or Taxcaster or some similar tool assuming no 72t or Roth conversions. Then add Roth conversions until you get to the top of your current tax bracket or the 15% tax bracket. Take the change in tax divided by the Roth conversion amount and you'll see your effective tax rate on the conversion.

 

[almost there]

No, I do not need the money now. Just thinking ahead. Plus with a Roth, if I did need some cash in the next 7 yrs. its easier to access penalty free than a IRA I seem to recall. You can access contributions but not gains after 3 years or something like that. And yes, I do not plan on ever going over the 15% bracket ever again. Got killed last year with the 1 yr's severance check on top of 7 months working ....... So this looks like a better way to go. I was in shock they tax a severance like a bonus rather than retirement $$. 45% as I recall........ Ouch! Then I thought I would be getting a lot back at the end of the year. No dice, it put me firmly into the 33% tax bracket. And there was nothing I could do about it except max out my 2013 401k + catch up contributions before I left. I did feel semi bright for doing that though. It was just tough seeing 60k go out the window when I was to venture off unemployed...

 

[pb4uski]

You probably didn't have any control over the timing of your severance, but those are the reasons that I ended work in December, but stayed on payroll "on vacation" for the following January and February. It allowed me to take all my pay and defer it and max out my 401k.

If I had instead quit in December and received a check for my unused vacation the taxes on it would have been painful because I had already maxed out my 401k for the year.

 

[Derslickmeister]

Sketch out your 2014 tax return in TurboTax or Taxcaster or some similar tool assuming no 72t or Roth conversions. Then add Roth conversions until you get to the top of your current tax bracket or the 15% tax bracket. Take the change in tax divided by the Roth conversion amount and you'll see your effective tax rate on the conversion.

This is a fantastic idea. Learn something new everyday on this site. I'd actually heard of doing this but the light bulb didn't turn on until I read your post just now, makes perfect sense now

 

[almost there]

"You probably didn't have any control over the timing of your severance"
Nope, no real control on the timing. .......... I made it thru the 1st and 2nd voluntary and non voluntary cuts.
(They call them wave's now) Sounds so nice....... I took off on the 3rd voluntary wave.
I could have stayed as I took a "voluntary package". Then 50 % got the same thing but non voluntary the next month...I will call that the outside clean up set.
Again I might have made that cut and still been there as 10% are still there and are said to get the same deal. (But you cant say when, I was told it could be 6 months or 6 years) But after 30 yrs I did get the 80% medical and a years pay. That was good enough for me. Did loose a years sick pay by not using it for 30 yrs. If I was 55 I would have got 20% of it. That was my goal. But again, it seemed like a good idea to walk out on my own terms rather than possibly being showed the door.
If I could have had a choice, it would have been last Jan. as It would have saved me about 30k in Tax's. But that's just how it goes. No regrets or complaints. The folks that stayed are miserable....... Like being on death row IMO. I was just happy to walk out with my dignity and their cash.
That I used to pay off a 4 bedroom rental. $2k / mo. It may not have been the best plan ever, but it works for me.

 

[Trawler]

Retired at 51 in 2012 and DW last year in May. Our 2013 AGI was $85 K of which $20K was earned income about 10K in Dividends and interest the balance was Long Term capital gains. Fed tax bill $352 and we did not itemize. We took the gains this year because or Earned Income and dividends was low enough to have ZERO capital gains tax and we did not have a subsidized HCA plan . Going forward we need to watch AGI due to HCA Health Policy that is subsidized. Our plan is to roll over IRA to Roth to amount that maximizes HCA Subsidy and minimizes income tax. My estimate is we will roll from IRA to Roth around 29K per year. We have this year a fully funded HSA savings account which is tax deductible as our health policy is HSA compatible. Be sure to look at Health Insurance cost subsidy if buying from The new Govt marketplace as part of your strategy.

 

[Trawler]

Just reread original posters post and saw medical was covered in severance. If it is a high deductible plan then look at setting up a Health Savings account as it is a deduction even if one does not itemize deductions,

 

[pb4uski]

"You probably didn't have any control over the timing of your severance"
Nope, no real control on the timing. .......... I made it thru the 1st and 2nd voluntary and non voluntary cuts.....

One company I worked for had voluntary severance once. It was the stupidest thing I saw in my career. The company was in a rural area and one of the best employers in the area.

Many of the people who had good marketable skills and were not tied to the area took the severance, and immediately got similar or better jobs elsewhere. We lost a lot of good people. For the most part the good people who stayed were tied to the area. Meanwhile, the deadwood who were not particularly good at their jobs and knew they couldn't get a job elsewhere stayed.

So net, we lost many of our best people and had mostly deadwood to try to handle the same volume of work.

 

[45th Birthday]

The best way to do tax planning is to read these fora and other similar ones. Start making lists of all strategies that have tax implications (HSAs, Roths, tax loss harvesting, etc.) Sit down and make a list of all your accounts, sources of income, and deductions and note which ones might intersect with the tax strategies. Figure out roughly how much spendable income you need now and in the future. Then, use TurboTax or other software to do "what if" calculations to determine the best path.

The best plan will be a combination of a bunch of different ideas that are specific to you. Short of paying someone lots of dough to do this, I can't think of a better way. Takes some work, but well worth it. I had a spendable income last year well into the six figures plus did a Roth conversion for $50K, and my federal tax rate worked out to .8%.

 

[almost there]

Just reread original posters post and saw medical was covered in severance. If it is a high deductible plan then look at setting up a Health Savings account as it is a deduction even if one does not itemize deductions,

The medical Ins coverage of was one of the main reasons I was able to leave. I hope ACA does not screw it up. It worries me a bit...
As several folks believe it will raise premiums over the next few years and lessen the list of Ins. options.
My wife and I have Kaiser Permanente. Its great Ins and much less than the other options. The Co pays 80%, I pay 20%.
My portion is currently $200.00 per mo. $20.00 co pay, no deductible.
I hope Kaiser does not drop from the list of options due to ACA.
It was the only grandfather clause I made with my age & years. Lost out on several big things like full retirement. (Over $250k worth overall)
They chipped away at the retirement plan over the entire 30 yrs I was there. Things were removed based on hire date & age. Its the only time I ever wished I was 3 yrs older. LOL LOL
1/2 way through my career my pension was cut in less than 1/2. I had the years, but not the age. And retiree medical went from 100% to 80% coverage. But I guess its better than nothing! The last 15 yrs were weird as some folks got it, and some did not. I missed it, but did get the medical.... For now anyway. LOL LOL

 

[LOL!]

The amount to convert from traditional to Roth can be figured out with TurboTax (Taxcaster is probably not good enough) and with some ideas from Retirement Calculator - Parameter Form . But still double-check with TurboTax because of your unique personal situation.

Here is a long discussion of this: Bogleheads • View topic - How to pay ZERO taxes in retirement with 6-figure expenses