Minimal savings outside retirement accounts-a hole in our plan?

[eytonxav]

Whats really tough is when you start taking RMDs coupled with SS and pension. As one who had most of my savings in before tax $ and even after living off of that alone for many years, staying at a lower tax rate will not be in the cards for me come 2019. Do those roth conversions earlier rather than later.

 

[bingybear]

Agreed. While it is desirable to have after tax funds, you do not want to get that result by pre-paying tax at a higher rate now than in retirement.

I boosted after tax savings after maxing out tax deferred.

+1

Whats really tough is when you start taking RMDs coupled with SS and pension. As one who had most of my savings in before tax $ and even after living off of that alone for many years, staying at a lower tax rate will not be in the cards for me come 2019. Do those roth conversions earlier rather than later.

what is more tough is after the 1st to die and RMD's are about the same, but you are taxed as a single filer.

 

[DEC-1982]

I see one problem that we've started on fixing, that we have only a couple of months of expenses in after-tax accounts. I'm thinking that we should have double or triple that on retirement day, which we can probably get to without cutting our pre-tax savings rate.

Only 2 months of expenses in after-tax accounts seems low, but as somebody said earlier it may not make sense to suddenly start paying 22% tax now if you might pay 12% after retirement.

I believe the conventional advice is that while one is working one should keep 6 months expenses in an emergency fund (which would be after-tax). Well, never mind, it doesn't matter now.

 

[VanWinkle]

For those looking into ACA for health care, it makes sense to keep non-qualified savings handy to help reduce your income for tax credits. Of course, if your prior employer provides insurance, or you have a pension in excess of ACA MAGI limits, it is a moot point.

I agree with you on the ACA reason to boost after tax accounts. I believe that after maxing the tax-deferred accounts, there is much to be gained by establishing 20-25% of your assets in an after tax account. This will give you the ability to control you income each year and do extensive conversions in the 10-12% tax brkt prior to taking SS.

I currently have about 44% of my savings in both taxable brokerage and Roth accounts. It makes controlling income for ACA much easier and I have already done one "0" tax ira conversion to Roth.

I agree that tax deferred should normally be maxed out first.

 

[kgtest]

I'm not kgtest, but I'll answer anyway. I will be 60 when we retire next year. I am still contributing enough to tax deferred to keep us just at the top of the 22% bracket for taxable income, but not more. It does not make much sense to me to save 24% now just to pay 24% next year, so I'll pay the tax now and have a little more flexibility after we retire as to where and when to draw money.

In ER, I will be backdoor converting up to the 22% as I've been doing *up to 15 prior to change.

Spreadsheet shows I will have about 25/75 after tax funds available at ER at 50, and more like 50/50 come RMD. I THINK that will allow some flexibility.

Then since my first decade of ER is going to be somewhat cheaper than the second, I will do more aggressive conversions, while living off cash, brokerage dividends and some rental income. The three legged stool...until tiny Pension, SSA , Spouse SSA and then RMD kick in 6legged. Then I start having a real tax problem, add a couple sizable 1mil+ trust/inherited IRAs and those RMD schedules (7/8 legged) and I will have a bigger torpedo. This of course assumes I stay healthy, my family doesn't experience financial tragedy, and tax code doesn't vary too much.

Currently saving at a rate of 46% HH gross, next year projected 58% of gross. Once daycare is done, possibly a little more >70% but likely I just invest that extra yield into the 529s or a taxable.

I was going to buy another property in Florida to offset tax liabilities, but I am gonna put that on hold and enjoy my summer, let the cash build up again and tackle it next year. Prob unwise with interest rts rising but more cash means less interest.

Soo in a long winded reply, and not to hijack OP thread, that is somewhat my approach.

 

[RenoJay]

I have the vast majority in taxable accounts, mostly because of already maxing retirement accounts in big earning years. I like the freedom. I think it’s important not to let the tax tail wag the common sense dog when it comes to planning our lives.

 

[NW-Bound]

I never had as low as 2 months of expenses in after-tax money. I do not feel secure unless I have a few years. Ten years would be good. It started soon after working full-time, as dipping into retirement funds for any sudden hardship was to be avoided.

This thread makes me look back at my balances. I used to have 32% in after-tax money when my earned income stopped in 2012. The percentage is down to 23% now, and it was due to the living expenses while waiting to get to 59-1/2 for IRA withdrawal, which I have been doing the last 2 years.

The pleasant surprise is that in total dollar amounts, the after-tax accounts stay roughly the same! I was living off the growth. The percentage goes down because the retirement accounts grew. See how nice it is to retire into a bull market? How lucky is that?

 

[Out of Steam]

I never had as low as 2 months of expenses in after-tax money.

We never had a lot outside retirement accounts, but it was depleted by paying college tuition out of current income. That 2 months does not include a small Roth IRA that would yield another 3 months of expenses. I would prefer to leave that untouched for now.

Seems like saving to double our "money in the bank" to 4 months by retirement day is a reasonable goal.

 

[iloveyoga]

We saved so much in our retirement accounts when we were working, it seemed like the way to go at the time and of course I just hate paying taxes. But I do wish now that I had stockpiled a larger amount in taxable savings accounts. I am looking forward to age 59.5 in August.

 

[FANOFJESUS]

I have heard 50/50 is a good mix half taxable half in 401k
I don't know if that is true. What do you think?

 

[RunningBum]

We saved so much in our retirement accounts when we were working, it seemed like the way to go at the time and of course I just hate paying taxes. But I do wish now that I had stockpiled a larger amount in taxable savings accounts. I am looking forward to age 59.5 in August.

It probably was the right choice. It's no fun to pay the taxes now, but if the rate is lower than what you were deferring at, it was the right choice, especially if you didn't need it before 59.5. As your paying taxes, just keep in mind that you'd be netting less if you hadn't deferred. That should make it easier to stomach.

 

[googily]

What a good thread to ask a question I've had on this.

My savings are about 16% after tax and the rest in retirement accounts, except that more than half of the retirement account number is the IRA I inherited from DH. I can withdraw from that at anytime without penalty, but of course with those withdrawals being taxed as income.

I am 51 now, and do hope to quit working in the next year or so. Would it be beneficial to be moving some of the money out of the inherited IRA while I am still working to up my after-tax pot a little more? I would only do it up to the top of my current tax bracket, but am thinking that even just taking the dividends and then investing them in my brokerage account might not be a bad idea.

I would expect having to go to ACA when not working, btw. And the after-tax account right now is about four years of expenses, though I do also get a very small pension from DH. I would also expect to start SS survivor benefits at 60, and would also probably convert the inherited IRA to a new IRA of my own when I get to 59.

 

[RunningBum]

What a good thread to ask a question I've had on this.

My savings are about 16% after tax and the rest in retirement accounts, except that more than half of the retirement account number is the IRA I inherited from DH. I can withdraw from that at anytime without penalty, but of course with those withdrawals being taxed as income.

I am 51 now, and do hope to quit working in the next year or so. Would it be beneficial to be moving some of the money out of the inherited IRA while I am still working to up my after-tax pot a little more? I would only do it up to the top of my current tax bracket, but am thinking that even just taking the dividends and then investing them in my brokerage account might not be a bad idea.

I would expect having to go to ACA when not working, btw. And the after-tax account right now is about four years of expenses, though I do also get a very small pension from DH. I would also expect to start SS survivor benefits at 60, and would also probably convert the inherited IRA to a new IRA of my own when I get to 59.

What is it you are trying to accomplish by moving more of it to taxable? Does it just seem like a good idea to you, or have to worked out the numbers to see if it's a good move in the long run? Are you going to be taxed at a lower rate when you retire? That would be a better time to withdraw tax deferred funds. It doesn't make sense to withdraw at, for example, the top of the 22% bracket now, if you'll be able to withdraw it at 12% later. I would love to have all of my money out of my tIRA now, but I'm being patient and converting it over time to minimize taxes over the years, as best as I can predict.

Rather than move it to taxable, why not start Roth conversions? A Roth is a better place to have money than taxable since the gains and dividends will never be taxed. I don't really know all the rules on inherited IRAs, but my understanding is that if it's from a spouse, one of your options is to treat it as your own. If you've chosen another option that may not be available to you, and you may not be able to convert. If you're needing that money in early retirement, you'll need to know Roth withdrawal rules (Fairmark.com describes them well) so it may not work in that case.

 

[ncbill]

Can't convert an inherited traditional IRA to a Roth IRA.

 

[pb4uski]

....Would it be beneficial to be moving some of the money out of the inherited IRA while I am still working to up my after-tax pot a little more? ...

In most cases... definitely NOT. Your marginal tax rate while you are still working is likely higher than your marginal tax rate once you retire and those tIRA withdrawals will be taxed at your marginal tax rate(s).

You can get a good idea by doing a pro forma tax return for 2018 with your work income and some tIRA withdrawals and another for your income and tIRA withdrawals in retirement.

 

[RunningBum]

Can't convert an inherited traditional IRA to a Roth IRA.

Since (edit: not the OP) googily said it was inherited from DH (unless I read that wrong), she can treat it as her own.

https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries

Presumably that means you can convert it to a Roth since you can do that with your own, and are able to treat this as your own.

 

[googily]

Thanks, all. It is a spousal inherited IRA, but I don't want to convert it to a traditional IRA yet, because I want access to the money before 59.5. At that point, I will convert it, mainly to reset the inheritance rules for it.

The only thing I was really thinking to accomplish by moving the money now would be avoiding too much income if I'm on ACA, in case I need to withdraw from that account before 59.5. And to also pare down the eventual very large RMDs, since I will also have those with my 401k.

But maybe the thing to do is to wait until I am no longer working, and play with how much I can withdraw from the inherited IRA without a) bumping up the tax bracket and b) messing up any ACA subsidies.

I have never understood Roth conversions, no matter how hard I have tried to concentrate! Probably because I never have qualified to have a Roth, so my brain just shut it out.

 

[pb4uski]

Roth conversions are easy... you move money from a tIRA to a Roth IRA... say $100.

$100 shows up as pension income on your tax return and your taxable income increases by $100 (assumes that your tIRA is totally tax-deferred which is typical)... so if you are in the 15% tax bracket you pay $15 in tax.

The $100 in the Roth grows tax-free until you withdraw it spend and is not subject to RMD.

You can convert even if you are not eligible to make Roth contributions.

 

[NgineER]

If you have another t-IRA you can do Roth conversions from that rather than the inherited one. The end result would be the same.

 

[RunningBum]

The only thing I was really thinking to accomplish by moving the money now would be avoiding too much income if I'm on ACA, in case I need to withdraw from that account before 59.5. And to also pare down the eventual very large RMDs, since I will also have those with my 401k.

But maybe the thing to do is to wait until I am no longer working, and play with how much I can withdraw from the inherited IRA without a) bumping up the tax bracket and b) messing up any ACA subsidies.

Sorry, I misread your first post on this, I thought you said that you were NOT going to be on ACA. My mistake. Moving some of it over to taxable now may make sense for you. The Roth may be less attractive because of the 5 year rule. You'd be penalized for withdrawing any conversions that have been in the Roth for fewer than 5 years before age 59.5. It may make sense to convert enough to the Roth to cover the time from 5 years from now to 59.5, as that's still a better place to hold money than a taxable account.

Still worth doing some math and guesswork. The ACA subsidy may or may not be worth paying the higher taxes for. Maybe you can strike a balance and only withdraw an amount that keeps you under 400% FPL. And you may pay the higher tax rate only to find that the subsidy has gone away when you'd want it. So hard to predict, and even if it was predictable the math isn't trivial.

 

[googily]

Roth conversions are easy... you move money from a tIRA to a Roth IRA... say $100.

$100 shows up as pension income on your tax return and your taxable income increases by $100 (assumes that your tIRA is totally tax-deferred which is typical)... so if you are in the 15% tax bracket you pay $15 in tax.

The $100 in the Roth grows tax-free until you withdraw it spend and is not subject to RMD.

You can convert even if you are not eligible to make Roth contributions.

Thanks for the needed tutorial! I do have a tIRA (at least I assume it is, it was a long-ago 403b rollover). It's a pittance in my overall net worth, but I will ponder this.