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Poor friend heading to 60--any ideas?
Old 07-22-2020, 05:10 PM   #1
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Poor friend heading to 60--any ideas?

I have a friend who's been out of work due to covid and not a particularly good saver (!) who called me for some advice on where to direct any future savings.

Here's his situation:

58, single
20k emergency fund
10k IRA (all in Vanguard STAR fund)
Total monthly expenses = 2k

Currently only income is unemployment (which is covering the bills for now), but anticipating finding f/t work again in the fall hopefully. He knows he's working for the rest of his life and is late to the game, but would like to take measures to at least help the situation as he grows older.

Good news is he's in a rent controlled apartment and gets cheap ACA.

My questions:

1. At 58 yrs old (turning 59 this October) is there any use investing future dollars in a Roth? Or should any/all future savings just be thrown in a taxable account?

2. Is it worth rolling over the IRA into a Roth or just leave it alone?

3. Is STAR an ok thing for him to be invested in? Seems to be about 58/42 and returns look decent enough.

Thank you!
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Old 07-22-2020, 06:04 PM   #2
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STAR is a great fund... I used it for my kids college savings.

Given that he is low income and low tax rate a Roth would be ideal. tIRA savings principally a tax-arbitrage play and in his case it sounds like he will be in a low tax bracket for life so not a huge benefit.

I would look at a Roth conversion in Decemeber once he has an idea what his income for 2020 will be.

You/he should look into the Retirement Savers Tax Credit if he hasn't already done so. If his 2020 AGI will be less than $19,500 the feds will give him a 50c tax credit for each $1 that he contributes to a tIRA or Roth. If his income is a little over $19,500 he can make a deductible tIRA contribution to reduce his AGI under $19,500 to get 50c vs 20c.

So for example, if he had $20k of income, he could make a $501 tIRA contribution to reduce his AGI to $19,499... at that point he would owe $708 in tax before any Retirement Saver's Credit and would get a $251 credit from his $501 tIRA contribution, so he would owe $457.

If he also made a $914 Roth contribution he would get another $457 tax credit which would totally wipe out his tax so he would get all of his withholdings refunded.

So at the end of the day, he contributed $1,415 towards his retirement and the government gives him $708. Almost a free lunch!

https://smartasset.com/taxes/underst...ers-tax-credit
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Old 07-22-2020, 08:10 PM   #3
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he should get an estimate from social security.
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Old 07-22-2020, 08:38 PM   #4
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In his situation, I cannot think of any advantages of a taxable account over a Roth.
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Old 07-22-2020, 09:56 PM   #5
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This may be unlikely, but if he's made any of those IRA contributions in the past three years and did not claim the retirement savings tax credit (mentioned by @pb4uski above) on his federal income tax return but was eligible to do so, he could amend his recent several (3-ish) returns to claim the credit and get some additional money that way.
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Old 07-23-2020, 05:00 AM   #6
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In his situation, I cannot think of any advantages of a taxable account over a Roth.
Penalty free access to his money for the next 18 months until he turns 59 1/2.
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Old 07-23-2020, 08:15 AM   #7
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Penalty free access to his money for the next 18 months until he turns 59 1/2.
Thanks for the feedback. So once he's 59.5 is Roth/IRA no longer of use--i.e. just save in taxable?
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Old 07-23-2020, 08:40 AM   #8
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Penalty free access to his money for the next 18 months until he turns 59 1/2.
But, as you well know, he can withdraw his contributions penalty free. But I know that you know that.
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Old 07-23-2020, 08:44 AM   #9
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Thanks for the feedback. So once he's 59.5 is Roth/IRA no longer of use--i.e. just save in taxable?
No, that was not the message. In a Roth, earnings on the investment are not taxed. Roth is nearly always better than taxable (except in some edge cases that your friend is unlikely to face).
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Old 07-23-2020, 08:47 AM   #10
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Thanks for the feedback. So once he's 59.5 is Roth/IRA no longer of use--i.e. just save in taxable?
No, after 59 1/2 one can take money out of the Roth penalty and tax-free so it is a great vehicle for savings.

But a taxable account in equities can be almost as good in the for domestic equities qualified dividends and LTCG are tax-free at your friend's income level (under $40k of taxable income.... $52,400 of total income.... 2020 numbers).
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Old 07-23-2020, 03:31 PM   #11
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Originally Posted by tmitchell View Post



He knows he's working for the rest of his life and is late to the game, but would like to take measures to at least help the situation as he grows older.



Good news is he's in a rent controlled apartment and gets cheap ACA.

Your friend might not need to work “the rest of his life” but only something less than ten years.

I have a good friend in this same age and situation who similarly asked me what he should do. I advised my friend to find out how much he’d make each year in SS if he waited until age 70 to take it. He did and reported back that this amount would cover his modest needs.

Then I said, “Your game is to try to save as many times that annual amount in your 403b as you can. If you can save 1x, you can retire at 69. If you can save 2x that amount, you can retire at 68, etc.”

That seem to inspire my non-saver friend, who opened his 403b and is getting the match, at least. Good luck to your friend.
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Old 07-26-2020, 02:45 PM   #12
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Your friend might not need to work “the rest of his life” but only something less than ten years.

I have a good friend in this same age and situation who similarly asked me what he should do. I advised my friend to find out how much he’d make each year in SS if he waited until age 70 to take it. He did and reported back that this amount would cover his modest needs.

Then I said, “Your game is to try to save as many times that annual amount in your 403b as you can. If you can save 1x, you can retire at 69. If you can save 2x that amount, you can retire at 68, etc.”

That seem to inspire my non-saver friend, who opened his 403b and is getting the match, at least. Good luck to your friend.
Thanks I’ll run this perspective by him. Hopefully it helps!
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Old 07-26-2020, 04:31 PM   #13
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Great. I’d be curious how he replies!
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Old 07-27-2020, 05:15 PM   #14
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For someone who doesn't pay income taxes, the Roth versus traditional IRA matters in some weird ways. Sure, there is no tax deduction for a Roth IRA contribution, but so what since there are no taxes? But by the same token the traditional IRA contribution would not decrease taxes below zero without the saver's credit I suppose.

And when withdrawing, the withdrawals from the Traditional IRA would not be taxed for someone with such low income that they don't pay taxes.

However, one needs some income in order to get ACA subsidies, do they not?

These kinds of things are not in the normal realm of tax planning.
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Old 07-27-2020, 07:52 PM   #15
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For someone who doesn't pay income taxes, the Roth versus traditional IRA matters in some weird ways. Sure, there is no tax deduction for a Roth IRA contribution, but so what since there are no taxes? But by the same token the traditional IRA contribution would not decrease taxes below zero without the saver's credit I suppose.

And when withdrawing, the withdrawals from the Traditional IRA would not be taxed for someone with such low income that they don't pay taxes.

However, one needs some income in order to get ACA subsidies, do they not?

These kinds of things are not in the normal realm of tax planning.
Retirement savings tax credit is nonrefundable, so it would not reduce tax owed below zero in any case.

If you have low income, contributing to a Roth IRA is usually a much better deal - no taxes due ever.

Estimated income needs to be above 100% or 133%/138% of FPL in order to get ACA credits. Depends on if the state expanded Medicaid or not.
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Old 07-31-2020, 04:52 PM   #16
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Even though he is in a rent controlled apartment, is there any way he can move to an area (job waiting of course) , in a lower cost of living area?
he may need to get radical and start a side business or two (window washing, lawn mowing, walking dogs).
Whether he should roll the 401K into the Roth depends on if he can afford to pay the income tax on the rollover.
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