Mistake made

[GrayHare]

Yup, many big savers get caught in the tIRA and t401k Traps. Gains that might have been taxed at lower dividend and CG rates will instead upon withdrawal be taxed as ordinary income, which is a higher rate for many big savers.

 

[orplanner]

Don't know which calculators you have or their capabilities. Optimal Retirement Calculator and Retirement Decision Support System will provide a summary by year of your tax payments and what tax brackets they are taken from. It will also recommend how much from each account (taxable, tax deferred, Roth) to use each year to minimize taxes over your life time. Lastly, it has an option to allow it to make suggestions on how much of a traditional IRA to convert to Roth IRA each year to also minimize taxes over time. Other programs may do same but this is the one I am familiar with and mentioned often on this board.

If anyone knows of other calculators with this kind of capability I would sure appreciate hearing about them.

 

[Sunset]

At the age of 62 I feel that I have made a mistake when it comes to saving money in different accounts... now planning for retirement and looking at all the tax stuff, I realized that we should have put more money into a taxable account.... Most of our money is in a tax deferred account... In which we could be hit with high taxes when we hit into our 70's.
I am now doing calculators on how much to take out of the tax deferred account so we do not get hit when the RMD hits us.

Same issue here... better than not having enough

One thought I have had is how the non-retirement dividends, limit the amount of Roth conversion within 15%.

Worse of course is funds that drop tax reportable surprise div and capital gain distributions, really messing up the conversion planning.

We are selling off funds for more tax friendly ETF's.

 

[YVRRocketSurgery]

We have similar account types and issues in Canada where we're forced with minimum withdrawals from our retirement account at age 71. I'm trying to find "decumulation" type articles in order to manage my buckets and limit taxes.

I max out contributions to my registered accounts (401k~RRSP and Roth IRA~TFSA) and have a bit of an index and dividend stock taxable portfolio. The plan is to start shrinking down my 401k~RRSP account, yearly after retirement. But I'd love to find a calculator/tool to determine the optimal withdrawal amount based on Canadian tax rates.

 

[hnzw_rui]

Yup, many big savers get caught in the tIRA and t401k Traps. Gains that might have been taxed at lower dividend and CG rates will instead upon withdrawal be taxed as ordinary income, which is a higher rate for many big savers.

I wouldn't really consider it a trap. I'm in 25% marginal for federal and 9.3% marginal for state. If I'm able to work until I'm eligible for normal retirement (55/30) and pension pays out as promised, I expect to be in the same marginal tax bracket upon retirement owing to pension alone.

However, I'd still rather have too much money in tax deferred than not have enough due to paying 34.3% income tax during accumulation. Plenty of time to do Roth conversions prior to RMDs if needed.

I think the benefit of having money in different accounts gives you options when looking to withdraw money in retirement.

For example....say a retiree has $3million in accounts with $1 million in taxable, $1 million in tax deferred (Trad IRA) , and $1million in in a tax free account -Roth IRA. And within each of these accounts there is a mix of equity funds and bond funds (obviously muni bonds in taxable and taxable bonds in the Trad and Roth Ira).

Now a retiree can withdraw from an account which would least disrupt one's asset allocation AND minimize taxes. PErhaps do a little tax loss harvesting in taxable. MAybe withdraw from a Roth for a big purchase such as a new car to avoid being thrust into a higher tax bracket or lose an ACA tax subsidy.

It's all about having choices available to meet your expenses and minimize taxes at the same time. For myself I am trying to do as much as I can in Roth conversions to build up my ROTH accounts if future withdrawals from these accounts works from a tax perspective.

Being able to optimize for retirement taxes while still in accumulation mode is certainly ideal. Unfortunately, tax optimization is largely dependent on unknown future market returns and circumstances. Given this, I'd rather err on the side of caution and have too much saved in tax deferred than risk having too small a portfolio.

 

[robnplunder]

I think the benefit of having money in different accounts gives you options when looking to withdraw money in retirement.

< Snip >

It's all about having choices available to meet your expenses and minimize taxes at the same time. For myself I am trying to do as much as I can in Roth conversions to build up my ROTH accounts if future withdrawals from these accounts works from a tax perspective.

+1.

Also, when retiring, include "tax" in the spending budget as part of regular expense.

 

[Texas Proud]

I thought that may have been my case too, but when I checked tax rates from when I started my 401k that wasn't true.

https://www.scribd.com/doc/190499803/Fed-U-S-Federal-Individual-Income-Tax-Rates-History-1862-2013 shows historical tax brackets. There were a lot more tax brackets back before 1987, if that's when you started, and the rates in general were higher, especially if you didn't have any tax shelters.

I started contributing to a 401K in 1984 or 1985. Remember that the deferred money is taking off the marginal (top), not your effective (average) tax rate. If it was a partial year of full time work in 1984 I was on the 23/26% border, then 30% the next year, plus I was only deferring up to my company match, so I feel good about the early deferrals. If you want to convince yourself you can check your SS wages against that table and see what you really deferred at.

Nowadays, with the bigger 15% bracket, I'm advising my son to only defer up to the company match, and contribute to a Roth after that.

28% might be a high conversion rate compared to partial conversions at 15%, but if the investments have done well in a Roth, you aren't paying more taxes on them. Also probably not all of it was converted at 28% unless you were already in that bracket. I remember when someone said they did a full conversion in the year when you could defer paying the taxes by splitting it over the next two years. They did the math and figured they came out better by paying the higher taxes and having the nice growth that followed tax free, rather than having most of the money grow in the tIRA and pay taxes on those gains, even though it would've been a lower rate.

My motto is that if you made a mistake in the past, and it's too late to fix, learn from it, make the best decisions moving forward, and move on. No sense beating yourself up. If someone today is maxing out a 401K in the 15% bracket, the best decision moving on may be to reduce contributions to the company match, put the rest in a Roth and possibly a taxable account, and consider converting some of that 401K to a Roth if that's possible.

Thanks for the link...

WOW... I knew I paid a lot of taxes even with 'low' income.... but I did not remember the tax bracket being so low on the 15%...


SOO, probably made out on the investments... a few years after college I was able to start putting money in a 401(k)... I was putting 16% with a 6% match!!! Wished I made more money back then.... company went under and the new owner was not as good...


Yes, my ROTH conversions probably also paid off as I have done well on them...

And you are right... it is done.... nothing can fix it if it was done wrong, so I do not dwell on it.... heck, on most of these I do not even go back to determine if it was a good decision or not since I cannot change it and I thought it was the best decision at the time with the knowledge I had...

 

[pb4uski]

Thanks for the link...

WOW... I knew I paid a lot of taxes even with 'low' income.... but I did not remember the tax bracket being so low on the 15%...


SOO, probably made out on the investments... .....

Yes, my ROTH conversions probably also paid off as I have done well on them...

And you are right... it is done.... nothing can fix it if it was done wrong, so I do not dwell on it.... heck, on most of these I do not even go back to determine if it was a good decision or not since I cannot change it and I thought it was the best decision at the time with the knowledge I had...

+1 those tax rates were astounding. While I can remember roughly what i made at different years back then I have no idea what the exemptions and standard deductions were so it is hard to intuit a marginal tax rate other than it was high compared to today's tax rates. I wish they had included what exemptions and the standard deduction was worth each year.

 

[DrRoy]

Why not start taking the equivalent of RMD's immediately after retirement? Aim for the same taxable income now until death.

I am thinking along these lines too. Also, have you factored in that you got higher compounded returns by deferring taxes?

 

[MrLoco]

I looked at the IRS Uniform Lifetime Table which is used for RMD's from a Trad. IRA at 70 1/2 and the % of withdrawal required at various ages is as follows:

AGE RMD (% of total amount)

70 1/2 3.6%

75 4.4%

80 5.3%

85 6.7%

90 8.8%

So, through your 70's you are required to withdraw what most retirees would withdraw anyway if they were using a safe withdrawal rate. And you do not hit double digit % withdrawals until you are int0 your 90's.

Sure, if you have millions in a Trad. IRA future withdrawals at an advanced age will be huge, but there may be a way to offset this. MAny of us will need Memory Care, Nursing home care, assisted living care, and as long as we can still deduct medical/dental expenses on SChedule A (currently all those medical expenses that exceed 10% of AGI), taxes due on RMD's may be offset by our future medical expenses.

So it may actually be beneficially not to convert your entire Trad IRA to a Roth but leave a portion to deal with the above scenario.

 

[Davis65]

At the age of 62 I feel that I have made a mistake when it comes to saving money in different accounts... now planning for retirement and looking at all the tax stuff, I realized that we should have put more money into a taxable account.... Most of our money is in a tax deferred account... In which we could be hit with high taxes when we hit into our 70's.

You probably didn't make a mistake. If you had put the money into a taxable account instead of an IRA, you would have had less money to invest because you would not have been getting a tax deduction. And it would not have grown as quickly because you would have been paying tax each year. So overall, you would have less money now than you do have, although it would only be subject to tax on the capital gain, whereas now you pay tax on the whole amount.

It might balance out, or there might be an advantage to one approach or the other. it would take a fair bit of calculation to figure out which approach would have been better.

Or you could just be glad that you saved and have money, and not worry about saving a bit on tax, or paying a bit more.

Either way, you are better off than if you hadn't saved.

 

[RunningBum]

I looked at the IRS Uniform Lifetime Table which is used for RMD's from a Trad. IRA at 70 1/2 and the % of withdrawal required at various ages is as follows:

...

So, through your 70's you are required to withdraw what most retirees would withdraw anyway if they were using a safe withdrawal rate. And you do not hit double digit % withdrawals until you are int0 your 90's.

Sure, if you have millions in a Trad. IRA future withdrawals at an advanced age will be huge, but there may be a way to offset this. MAny of us will need Memory Care, Nursing home care, assisted living care, and as long as we can still deduct medical/dental expenses on SChedule A (currently all those medical expenses that exceed 10% of AGI), taxes due on RMD's may be offset by our future medical expenses.

So it may actually be beneficially not to convert your entire Trad IRA to a Roth but leave a portion to deal with the above scenario.

Maybe. But RMDs can make more of your SS benefit taxable, and may push divdends and LTCGs from 0% to 15% taxable. Also, in your schedule A example, with RMDs 10% of AGI is a lot bigger number, so you may actually be hurting yourself by making less of those expenses deductible.

I'm not going to worry if I can't get my tIRA fully converted by age 70, but that's my goal, based on my situation. Yours may be different.

 

[Markola]

You probably didn't make a mistake. If you had put the money into a taxable account instead of an IRA, you would have had less money to invest because you would not have been getting a tax deduction. And it would not have grown as quickly because you would have been paying tax each year. So overall, you would have less money now than you do have, although it would only be subject to tax on the capital gain, whereas now you pay tax on the whole amount.

It might balance out, or there might be an advantage to one approach or the other. it would take a fair bit of calculation to figure out which approach would have been better.

Or you could just be glad that you saved and have money, and not worry about saving a bit on tax, or paying a bit more.

Either way, you are better off than if you hadn't saved.

+1. I'd rather have more money and some taxes to pay than less money.

 

[jwr62]

Love all the input. Our swabb FA just gave me the retirement plan and if we never take any money out of the IRA we will be over 3,000,000 starting at 900,000. I still want to look at converting some money into our Roth and taxable account.... plus I feel that we will take at least 2.5% a year to play.

 

[pb4uski]

Huh? Never taking money out of your IRA isn't really an option (that's why they call it REQUIRED minimum distributions) so why would your FA show you a scenario that isn't really an option?

 

[Fedup]

I think she meant the amount will be high. So it's best to convert to Roth early.


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[jerryo]

I would think that you're nearly always better off deferring taxes on current earnings and on tax deferred investment for 20 or 30 or 40 years has to nearly always be a better deal than paying taxes upfront (ROTH accounts aside). You'd have to posit a much higher future tax rate to end up worse off.....

 

[cyber888]

I'm planning to take out little by little just right at the poverty level , so I pay $0.00 taxes to Federal and State. Put it in the taxable account and invest it in tax-exempt bond funds.