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Pay Tax Now or Later???
Old 09-08-2013, 06:56 PM   #1
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Pay Tax Now or Later???

Joined this wonderful site a year ago and visit almost daily to soak up retirement wisdom. Have learned much and feel well prepared and ready. I will be retiring at the end of December 2013 at age 59. Woo Hoo! I will receive about $31,000 of compensation and unused sick leave payable in 2014. My dilemma is how to take those funds. As the time gets closer, my gut tells me to take it in cash, bite the bullet and pay the income tax, stash the cash, and then fund my Roth instead of putting the max into my 403b. My pension is not Colaed. It will meet my needs far into the future. I have a sizeable 403b and taxable accounts. My emergency fund contains a year and a half of expenses. I would use some of the $$ to take a dream trip. Comments or suggestions are most welcome. Thanks in advance.
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Old 09-08-2013, 07:07 PM   #2
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I don't know if there's a "one size fits all" solution.

I bit the bullet, paid the tax, transferred what I could to retirement accounts, and used the balance to fund myself (including a vacation).

I'd probably think different with other obligations, though.

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Old 09-08-2013, 07:59 PM   #3
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If $30k is your only taxable income, you may pay very little in taxes. Take advantage of your low income to do some Roth conversions if you can, or just get that $30k into your taxable account cheaply.

Plan to max out whatever tax bracket makes sense in your situation. At least the 10% bracket and 0% capital gains. Watch out for the ACA subsidy limits if that also applies to you.

Figure out what your taxes will look like when you have to start taking required minimum distributions from your 403b, along with pension and Soc Sec. If you can get some of the money out of your 403b and into a Roth at a lower tax rate than that, then do it.
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Old 09-08-2013, 08:28 PM   #4
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I had a similar situation when I retired at the end of 2011. I maxed out my tax deferred savings (401k in my case).
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Old 09-08-2013, 08:48 PM   #5
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Since one can
(a) withdraw from a 403(b) at age 59.5 without penalty, and
(b) convert 403(b) to Roth IRA at anytime after separation from service.

I see no reason not to put the maximum into your 403(b). That will give you the most options. If you withdraw right away or in 2014, then it is as if it never went in. If you convert to Roth in 2014, it is as if you contributed to a Roth.

However, if you don't put in 403(b), then you have lost that tax-advantaged "space" in case you wanted to use it.

Presumably you will be delaying SS benefits and doing conversions to Roth for a while before drawing SS. Or perhaps you are not eligible for SS?

As for pay tax now: No. Don't pay tax before December 2014.
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Old 09-09-2013, 10:56 AM   #6
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Do an A/B comparison. Estimate your taxes 2 ways; taking the money in 2013 or 2014. Add up your total tax both ways, reviewing the advantages of the Roth and then choose. I've had similar problems and paying for an hours time with a CPA put a lot of money in my pocket. Good Luck!
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