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Old 12-08-2020, 09:21 AM   #21
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Originally Posted by sengsational View Post
Re: leaving IRAs to a non-spouse, that seems like a good idea on the surface, anyway (haven't thought long about it). But even if the survivor "needed the money" it would almost certainly be gifted back (picturing my kids getting a windfall and my wife struggling...the kids would give it back)
It’s a good option if one is convinced that the surviving spouse would not be underfunded, but rather overfunded.

The spouse also has the option of refusing the IRA inheritance in all or part I believe so that it would pass to the contingent beneficiaries.

Some have been concerned about non-spouse beneficiaries more than 10 years younger having to take the funds out within 10 years or otherwise paying higher taxes on IRA withdrawals. So it’s good to look at relative tax rates.
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Old 12-08-2020, 10:39 AM   #22
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There is a lot we cannot know: Future tax rates, future investment returns, mortality, and especially tax brackets of heirs.

But if you simply make assumptions and put it into a spreadsheet some pat solutions come out.

I think I spent too much time during my career reviewing forecasts that were wildly off from what really happened to get too concerned with RMDs. High taxes in retirement are actually a good problem to have and one to which many would aspire.

But having said that I think doing some Roth conversions is a common sense thing to do.
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Old 12-08-2020, 10:48 AM   #23
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I'll admit, I used to be afraid of RMDs, but I think it was drilled into my head by my family. I can remember when Grandmom hit 70.5, back in 1994. I would've been 24 at the time, and had little understanding of retirement accounts, IRA or otherwise, at the time. I just remember Grandmom complaining about it. And, my Mom tended to complain about it as well, even though she was years away.

But, once I started understanding the fact that you were getting the tax break when you put the money away, and it grew tax free, and only paid taxes when you took it out, it wasn't a bad thing. Obviously, the government is going to want their money at some point. Grandmom just got annoyed about being forced to take it out, because she didn't need it, and that's my Mom's complaint as well.

I did explain to my Mom, that if you don't need the money, just invest it in something else. Or even just save it for a rainy day.

In the past, I had planned to start taking IRA withdrawals at 59.5, since it's my hope that I'll be long since retired by then. I figured that if I started drawing down at 59.5, it'll lessen the impact when the RMDs start at 70.5 (or rather 72, now).

But, I just looked at the balance I have in IRAs (and my 401k). It's about $980K. I seem to recall the RMD for the first year, when it was 70.5, was something like 3.74%? I'm sure it's a bit different with backing it off to age 72, but not that different. So if I had to start withdrawing immediately, I'd have to pull out around $35-40K the first year.

I'm only 50, so I still have another 21-22 years to go before I hit RMDs. I'm sure the balance could easily double by then. So, once I'm retired, and don't have any more W2 income coming in, I might look into starting some Roth conversions.
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Old 12-08-2020, 11:02 AM   #24
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I think there's high likelihood one of you will predecease the other.

Which is why I don't understand one spouse leaving their tIRA to the survivor when the survivor has plenty to live on without the added tIRA funds & the increased RMD's drive them into higher tax brackets as you describe.

Instead, go ahead and leave your IRA's, or at least part of them, to the ultimate beneficiaries directly (assuming their tax bracket will be lower). The added benefit of that is the beneficiaries won't have to empty the larger lumped together tIRA in the same 10 year period, offering the opportunity to keep tax rates down over a lengthier period.

Then maybe I don't know what I'm talking about.
An interesting idea I hadn't thought of, we might plan accordingly. Thanks.
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Old 12-08-2020, 11:53 AM   #25
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Interesting discussion. I have wondered HOW MUCH there really is too gain by doing the conversions, but if it can be done relatively easily, and it can be used to goose the income up to the top of a bracket without going over, then it seems like a no brainer to at least do it on a small scale when you turn 59.5.
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Old 12-08-2020, 12:07 PM   #26
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Interesting discussion. I have wondered HOW MUCH there really is too gain by doing the conversions, but if it can be done relatively easily, and it can be used to goose the income up to the top of a bracket without going over, then it seems like a no brainer to at least do it on a small scale when you turn 59.5.
You can do it before 59.5. If you aren't working and have no other income, that's perhaps the best time to do Roth conversions, in very early retirement.
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Old 12-08-2020, 12:09 PM   #27
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Interesting discussion. I have wondered HOW MUCH there really is too gain by doing the conversions, but if it can be done relatively easily, and it can be used to goose the income up to the top of a bracket without going over, then it seems like a no brainer to at least do it on a small scale when you turn 59.5.
Why wait until 59.5? Start when your income drops whenever you retire.
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Old 12-08-2020, 12:20 PM   #28
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Certainly a valid approach. That’s our strategy. My IRA would go to non-spouse beneficiaries. At least half of DH’s larger IRA would go to non-spouse beneficiaries. For me beneficiaries are within the 10 year age limit so get lifelong drawdown schedule. For DH, 2 are more than 10 younger, but these folks are also approaching retirement ages and should be able to manage the 10 year deadline without too much tax pain and definitely paying lower tax rates than we would.
I thought nobody got the lifelong drawdown any longer (not counting spouses). I thought that starting with deaths in 2020 that everyone was on the 10-year drawdown schedule. Do I have that wrong?
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Old 12-08-2020, 12:27 PM   #29
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I thought nobody got the lifelong drawdown any longer (not counting spouses). I thought that starting with deaths in 2020 that everyone was on the 10-year drawdown schedule. Do I have that wrong?
The old lifelong rules still apply if the beneficiary is not more than 10 years younger than the IRA account owner.
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Old 12-08-2020, 12:31 PM   #30
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Currently we have 84% TIRA/401k, 13% Taxable and 3% Roth.
We are converting some Roth for the DGF this year, but for me (as well as my brother), we are still minimizing our MAGI for the ACA, vs. larger scale Roth conversions. Savings of 23k in total in this category. Additionally the 401k has a great stable value account, so that will stay most likely until 72 y.o and makes up 33% of the TIRA/401k account.

The plan is to do Roth conversions at age 66 for me (lump sum pension at 65).
I will not be able to get most of the TIRA converted, but also took the original deductions at the 33/35% brackets and was not qualified for Roth contributions.
So all in all, it works out the best it can.
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Old 12-08-2020, 12:44 PM   #31
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There is no magic to 59.5 since you can do Roth conversions at any age without penalty.. I suspect that you are thinking about withdrawals.

I think it is very situational. In our case, the savings are quite real from RE at 56 until I start collecting SS. During that time, absent any Roth conversions we would have $0 tax or be in the 10% tax bracket depending on what year we're talking about.

From 2013-2019, we converted $389k and paid $33k in federal tax on those conversions... an effective tax rate of 8.5%. As RMDs that money would be subject to 12% and 22%... probably ~16-18% based on my projections... so let's say 17%.

So by converting earlier I figure that I have saved $33k.... and a pretty easy way to save $33k. Now that SS is about to start for DW and will start for me in about 5 years, the pickings are slimmer, but I'll probably do substantial Roth conversions over the next 5 years, mostly so if one of us dies then the survivor won't be subject to much higher taxes.

Now for example, if you have a big pension and are already deep into the 22% tax bracket before Roth conversions then the opportunity is lesser because it is only 2% from 22% to 24% vs my 10% between 12% and 22%.

If one of us dies at 72 the survivor would lose DW's SS... that's it since my pension is 100% survivor. The standard deduction would halve so TI would go up some... about 7% by my calculations... but because of the different tax brackets between MFJ and single the tax would be 57% higher! Interestingly, the same 22% marginal tax bracket in each case but the survivor would be much deeper into the 22% tax bracket... in fact, almost to the top of the 22% tax bracket. That 57% jump in tax was eye-opening to me.
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Old 12-08-2020, 01:02 PM   #32
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Not scared. I have done an initial analysis with various tools, and for my situation it looks like a wash. This is a "first world problem" as far as I am concerned. I am doing some, since our individual IRAs are relatively small enough that it does not impact our current tax bracket. But I have a large 401K, and even with conversions will have large RMDs.

After taxes are accounted for, I still will be getting back a lot more from my 401K than the salary I deferred into it.That is what really matters to me.
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Old 12-08-2020, 01:07 PM   #33
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There is no magic to 59.5 since you can do Roth conversions at any age without penalty.. I suspect that you are thinking about withdrawals.

I think it is very situational. In our case, the savings are quite real from RE at 56 until I start collecting SS. During that time, absent any Roth conversions we would have $0 tax or be in the 10% tax bracket depending on what year we're talking about.

From 2013-2019, we converted $389k and paid $33k in federal tax on those conversions... an effective tax rate of 8.5%. As RMDs that money would be subject to 12% and 22%... probably ~16-18% based on my projections... so let's say 17%.

So by converting earlier I figure that I have saved $33k.... and a pretty easy way to save $33k. Now that SS is about to start for DW and will start for me in about 5 years, the pickings are slimmer, but I'll probably do substantial Roth conversions over the next 5 years, mostly so if one of us dies then the survivor won't be subject to much higher taxes.

Now for example, if you have a big pension and are already deep into the 22% tax bracket before Roth conversions then the opportunity is lesser because it is only 2% from 22% to 24% vs my 10% between 12% and 22%.

If one of us dies at 72 the survivor would lose DW's SS... that's it since my pension is 100% survivor. The standard deduction would halve so TI would go up some... about 7% by my calculations... but because of the different tax brackets between MFJ and single the tax would be 57% higher! Interestingly, the same 22% marginal tax bracket in each case but the survivor would be much deeper into the 22% tax bracket... in fact, almost to the top of the 22% tax bracket. That 57% jump in tax was eye-opening to me.
It is the most compelling reason to do Roth conversions in my view. Unlike future tax rates which could be higher, the same or lower, single rates are going to be much higher than married.
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Old 12-08-2020, 01:13 PM   #34
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The old lifelong rules still apply if the beneficiary is not more than 10 years younger than the IRA account owner.
Indeed. There are a number of other exceptions as well, including a disabled or very young beneficiary.

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Why wait until 59.5? Start when your income drops whenever you retire.
Indeed. I did my first conversion at age 46 in the year that I FIREd. This has the added benefit of additional flexibility, since I'll have about 26 years to do conversions. Right now my plan is to convert to the top of a FAFSA limit while my kids are in college, then to the 400% FPL level until age 65, then to the 22% bracket until I'm 72 (then the 24% bracket thereafter).

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I decided a few years back that it didn't make all that much difference doing it perfectly and doing it "wrong". I did that by running the numbers with and without conversions. I figure anyone who's worried about being in a high tax bracket after 75 is lucky indeed! Unless 75 is the new 35, and you don't ramp up your lifestyle, you'll probably have a hard time spending it all.
Strange. It may depend on one's specific numbers. In playing with my RMD / Roth conversion spreadsheet, I can easily get a difference of over $1M in net after tax spending over the 34 years in my plan depending on how much I convert and when.

While I very probably won't run out of money, that's enough for me to fiddle with to try to increase what my heirs would get.
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Old 12-08-2020, 01:21 PM   #35
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At 79 my parents were in the same situation. Now in their mid 80s, Mom needs expensive memory care which will drain their savings in less than 5 years if she lives that long. The Medicaid options are not good where they are at. And my father is dealing with cancer, and is reluctant to treat it because he thinks it will take money away from Mom's care, and he'd rather die than do that. It's no longer a first world problem. Most any one of us could face something similar. For most of us it would take more years, but why not do some basic planning to try to make it last a little longer.

I don't think my dad is being logical, as I don't think he's even been told how much this will cost and how much insurance will cover, but it's clearly wearing heavily on his mind and he's making it a factor in his treatment plan.

If you think it's not a problem worth concerning yourself about, don't. But don't tell others they are obsessing. That's not your damn business. Don't read these threads if it bothers you so much.

Good reason not to convert. Medical expenses including nursing home are income tax deductible for amounts over 7.5% of agi. You have to itemize to claim. Those deductions are at the top of your tax bracket.
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Old 12-08-2020, 02:08 PM   #36
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DH and I are 69 and 70 so we are approaching RMD ages. We give a substantial amount of our income each year to charity. In a few months when DH reaches age 70.5 we will start giving all our charitable contributions from his IRA (QCD--up to a max of $100,000 per year, we will be under that). The QCD is subtracted from your RMD so we will have to take little or no RMD going forward.
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Old 12-08-2020, 02:36 PM   #37
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At 79 my parents were in the same situation. Now in their mid 80s, Mom needs expensive memory care which will drain their savings in less than 5 years if she lives that long. The Medicaid options are not good where they are at. And my father is dealing with cancer, and is reluctant to treat it because he thinks it will take money away from Mom's care, and he'd rather die than do that. It's no longer a first world problem. Most any one of us could face something similar. For most of us it would take more years, but why not do some basic planning to try to make it last a little longer.

I don't think my dad is being logical, as I don't think he's even been told how much this will cost and how much insurance will cover, but it's clearly wearing heavily on his mind and he's making it a factor in his treatment plan.

If you think it's not a problem worth concerning yourself about, don't. But don't tell others they are obsessing. That's not your damn business. Don't read these threads if it bothers you so much.

Good reason not to convert. Medical expenses including nursing home are income tax deductible for amounts over 7.5% of agi. You have to itemize to claim. Those deductions are at the top of your tax bracket.
Yeah it can be a big deal. Sorry to hear about your parents' situation.
Your mother's situation lends itself again to potential irrevocable trust medicaid planning for those that have decent medicaid options.
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Old 12-08-2020, 02:38 PM   #38
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Scare me... not really.... but if one of us should pre-decease the other then RMDs will be very expensive as our brackets will be single rather than MFJ ....
Yep. Scare is a strong word. I am cautious about the existence of RMDs when combined with what were fairly large and disproportionate T.I.R.A. holdings at time of retirement. So far, we've been drawing down our taxable accounts to live, while converting to the top of the 24% bracket. May go to top of 32% beginning in 2021, as we will start living solely on TIRA withdrawals and still would like to get a much closer balance between the two account types before January 1, 2026.
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Old 12-08-2020, 02:54 PM   #39
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Jumping back into the fray... was out most of the day, but appreciate everyone's responses. Yes, 1st world problems.

While not perfect, I ran a few analysis on NewRetirement Planner Plus. While it's not perfect, is does use the current tax code and deductions (adjusts them annually by an inflationary factor I believe) and allows you to run some what if scenarios.

1) My Baseline Assumptions/Results

- Retirement withdrawals start age 56, 1/1/21, based on spending needs/wants/wishes
- RE accts split 50/50 after tax and 401K (no current Roth, all RE income from assets)
- SS starts age 70 (no pensions, other income)
- Steady annual expenses growing annually by inflation, all brokerage & 401k accts grow 5% year.
- Uses 100% after tax accts until RMDs hit, taxes stay very low (only State and capital gains) until 72 at which point RMDs have me consistently hitting 32% - 35%, +/- double NW at end of life. This would feel great until 72, but also feels like I am just kicking the can the road... kinda like or Fed government!

2) My Baseline Assumptions + 401K Withdrawals

- 15 years (thru age 71) of equal amount 401K withdrawals (represents +/- 56% of Yr 1 planned spend)
- Lifetime taxes drop 13% from Baseline
- Top tax bracket 22% until RMDs, then 24% until last 2 yrs of life when it hits 35%. This "feels" ok to me and solves part of the problem similar to Roth, but it appears it does not go quite as far?

3) My Baseline Assumptions + Annual Roth Conversions

- 15 years (thru age 71) of equal amount Roth Conversions (represents +/- 56% of Yr 1 planned spend, same amounts as used for 401K withdrawals)
- Lifetime taxes drop 17% from Baseline
- Top tax bracket 22% until RMDs, then 24% until last 2 yrs of life when it hits 35%. Ok, maybe...

4) My Baseline Assumptions + 3 Yrs Large Roth Conversions

- First 3 Yrs equal large Roth conversions, totaling the 15 yrs of Roth conversions noted above (I would have done 1 big Roth conversion, but calculator will not let you model a 7 figure conversion)
- Lifetime taxes drop 22% from Baseline
- Top tax bracket 37% first 3 yrs, then low (capital gains and state tax) until RMDs, then 24% until last 2 yrs of life when it hits 35%. This feels drastic, but wondering if swallowing the pill upfront helps avoid the slow bleed!

Of course a dollar today is worth more than a dollar in the future, so the savings in today's dollars on lifetime taxes is arguably less than the above.

I suppose I should give more thought to the surviving spouse tax hit as well. Ideas of maybe leaving partial tax differed accounts to kids another idea, but that also passes on a tax liability to them. Again, not complaining, just contemplating...
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Old 12-08-2020, 03:06 PM   #40
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Good reason not to convert. Medical expenses including nursing home are income tax deductible for amounts over 7.5% of agi. You have to itemize to claim. Those deductions are at the top of your tax bracket.
Right- QCDs can reduce RMDs, and large medical expenses, including long term care, can reduce taxes.
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