Tax avoidance strategies for withdrawal from large 401k?

[RunningBum]

Quote:

Originally Posted by mystang52 Isn't there an immediate tax hit when converting 401K to a Roth?;

Yes, but OP is taking the very same tax hit doing withdrawals. By suggesting a conversion of the same amount rather than withdrawal, it's the same immediate tax hit.

[ut2sua]

Quote:

Originally Posted by TonyClifton Because my natural tendency is to save instead of spend I have accumulated quite a lot in my 401k(s). I've suddenly sat bolt upright in my chair realizing I may have saved too much, at least as far as tax avoidance is concerned which is a major reason for 401ks and their tax advantages. Not wanting the heirs to deal with the tax complications of inheriting untaxed money, I'm interested in systematically withdrawing up to the limit of whatever tax bracket is appropriate, in this case currently 24%. The returns on that money reinvested though keeps pushing the income up, so again, higher tax brackets loom. I know, most folks should have this problem (heh), no argument there. I'm thinking one strategy is to invest withdrawn money in individual stocks of no or low dividend payout, so annual proceeds are low and then it's just LT capital gains that are due when they're sold. Does anyone know of strategies similar to what I've described to achieve the goal of 401k withdrawals that avoid the high taxes we were trying to avoid in the first place?

OP, you can do everything you stated, but if you take 1 more step to first convert your 401K monies to Roth by opening an IRA Roth account and put the $ in there, then you get everything you wanted except there is no LT capital tax to pay. You will need to report that on your tax return (the Roth conversion). As others have pointed out, with a Roth account, you need to open it for at least 5 years, then all monies will be tax free. If you have to withdraw before 5 years, then the capital gain portion may be taxed and/or penalized. The original converted amount should be tax free always. Do some research on Roth discussions in this forum to learn more. Lots of folks are making this similar move.

[Out-to-Lunch]

Quote:

Originally Posted by Alan The year I retired at age 55 I did a Roth conversion of my deductible IRA so only paid tax on the gains.

Just for clarity, you meant NON-deductible IRA, right?

Sorry if this seems like picking nits. I was momentarily confused, so others may be too (assuming I am correct).

[RunningBum]

Quote:

Originally Posted by CardsFan Not true. Taxable accounts get a step-up basis, as of the day of death.

What part isn't true? Let's say OP is able to either convert or withdraw all of the $2M in the 401K, and it goes up 50% before their death. Both accounts are now $3M.

If OP was converted it to a Roth the heirs have to withdraw it (move to a taxable account) within 5 (or is it 10) years with no tax hit. If they decide to move it lump sum to a taxable account, they now have a taxable account with basis of $3M.

If OP withdrew the 401K funds to a taxable account, heirs get a stepped up basis, so they new basis to the heirs is $3M.

So what part of what I said: "The beneficiary requirement is not a factor. At worst the beneficiary could take a lump sum distribution, which makes it the same as inheriting a taxable account. They could leave it to grow tax free for up to 10 years though." is not true?

[JustVisitingThisPlanet]

Quote:

Originally Posted by MichaelB I think a backdoor Roth might be an option. It’s worth looking into, and many members here are quite knowledgeable about the details.

Yeah I was willing to take the hit of Roth conversions last few years while working and then after retired, converted just enough Roth to stay in lower tax bracket. I've also converted to Self-Directed IRA (Roth and Tradtional), allowing broader opportunity (am in private equity now).

[Alan]

Quote:

Originally Posted by Out-to-Lunch Just for clarity, you meant NON-deductible IRA, right? Sorry if this seems like picking nits. I was momentarily confused, so others may be too (assuming I am correct).

Exactly, thanks for pointing that out.

[ut2sua]

Quote:

Originally Posted by CardsFan Not true. Taxable accounts get a step-up basis, as of the day of death.

CardsFan, could you elaborate a bit more? What does the step-up basis mean to folks who inherit these taxable accounts in terms of taxation?

[RetireBy90]

OP, also to consider, when you or DW pass and one is left, tax rates will jump due to filing as a single not married. If you convert today the survivor can take needed income from the Roth tax free.

[TonyClifton]

The DW and I opened Roth IRAs at Charles Schwab years ago. I just did one of those online chat things with a Schwab rep and she stated I just need to create a rollover IRA into which the non-Schwab 401k funds will be deposited and then they can be transferred into the Roth IRA from there.

[CardsFan]

Quote:

Originally Posted by RunningBum What part isn't true? Let's say OP is able to either convert or withdraw all of the $2M in the 401K, and it goes up 50% before their death. Both accounts are now $3M. If OP was converted it to a Roth the heirs have to withdraw it (move to a taxable account) within 5 (or is it 10) years with no tax hit. If they decide to move it lump sum to a taxable account, they now have a taxable account with basis of $3M. If OP withdrew the 401K funds to a taxable account, heirs get a stepped up basis, so they new basis to the heirs is $3M. So what part of what I said: "The beneficiary requirement is not a factor. At worst the beneficiary could take a lump sum distribution, which makes it the same as inheriting a taxable account. They could leave it to grow tax free for up to 10 years though." is not true?

Apologies. I thought you were comparing the tIRA to after tax, not the Roth. For a Roth, you are correct.

[CardsFan]

Quote:

Originally Posted by ut2sua CardsFan, could you elaborate a bit more? What does the step-up basis mean to folks who inherit these taxable accounts in terms of taxation?

Say you have $100k in an after tax account and $50k is cap gains. If you sold today you would pay taxes taxes on $50k. If you died today your heirs would get $100k. No taxes.

[TonyClifton]

So let's see if I have this straight: I can move funds from my work 401k or my previous employer 401k into a rollover IRA at Schwab, and then move that money into the Schwab Roth IRA that I already have. The amount moved is treated as ordinary income the same as wages for the purpose of calculating federal tax. Then from that point on, all future withdrawals from the Roth IRA are tax free, including investment returns?

If so, it seems odd that the IRS caps the annual allowable Roth IRA contributions at such a low figure, and only for a MAGI upper limit of $193k, yet if one contributes through the "backdoor" (a conversion) there is no limit, it's simply up to the account holder to determine the amount keeping an eye on the tax brackets.

Am I seeing this correctly? I'm wondering why those without a 401k or other tax sheltered retirement account are disadvantaged compared to those who can make a rollover.

[RetireBy90]

Quote:

Originally Posted by TonyClifton So let's see if I have this straight: I can move funds from my work 401k or my previous employer 401k into a rollover IRA at Schwab, and then move that money into the Schwab Roth IRA that I already have. The amount moved is treated as ordinary income the same as wages for the purpose of calculating federal tax. Then from that point on, all future withdrawals from the Roth IRA are tax free, including investment returns? If so, it seems odd that the IRS caps the annual allowable Roth IRA contributions at such a low figure, and only for a MAGI upper limit of $193k, yet if one contributes through the "backdoor" (a conversion) there is no limit, it's simply up to the account holder to determine the amount keeping an eye on the tax brackets. Am I seeing this correctly? I'm wondering why those without a 401k or other tax sheltered retirement account are disadvantaged compared to those who can make a rollover.

So first, I believe you are correct about moving funds to a Roth, and provided you don’t run afoul of the minor limits your withdraws are indeed not taxed.
Then there is reasoning behind the limits. I look at it as 2 separate issues. First is getting money into a retirement account like IRA or 401K. There are various limits on how much you can contribute to IRA or 401K each year. Second issue is moving money already contributed to a non-Roth to a Roth. This is not limited by amount. It is merely managing you retirement assets in my view.
Just my take

[TonyClifton]

Quote:

Originally Posted by RetireBy90 So first, I believe you are correct about moving funds to a Roth, and provided you don’t run afoul of the minor limits your withdraws are indeed not taxed. Then there is reasoning behind the limits. I look at it as 2 separate issues. First is getting money into a retirement account like IRA or 401K. There are various limits on how much you can contribute to IRA or 401K each year. Second issue is moving money already contributed to a non-Roth to a Roth. This is not limited by amount. It is merely managing you retirement assets in my view. Just my take

Roger that. You have pointed out something I hadn't considered, which is that no matter how big a pile you got, you were limited to creating it a few shovelsful at a time. So perhaps from the IRS's view they are fine with favorable tax treatment toward money folks have been steadily withdrawing from their paychecks for retirement. Makes sense!

[TonyClifton]

Doing more research, I've discovered my work's 457 plan has a Roth option. The plan administrator is ICMA-RC which provides government plans. Evidently I can choose to direct both untaxed and taxed money into the 457 plan and its Roth option, subject to yearly allowable maximums, $26k currently.

However, I see several reasons to forego creating a Roth option and instead go with moving old 401k money into the previously established Schwab Roth IRA:

1. The five year clock would start with the ICMA Roth, whereas it's not a factor with the Schwab Roth.

2. The Schwab Roth allows the purchase of individual equities and a broad range of mutual funds. The ICMA plan only offers mutual funds and is not really a trading desk.

3. The 401k to Schwab Roth conversion is not subject to annual conversion limits.

Have I got that right?

[ut2sua]

Quote:

Originally Posted by CardsFan Say you have $100k in an after tax account and $50k is cap gains. If you sold today you would pay taxes taxes on $50k. If you died today your heirs would get $100k. No taxes.

OK. I was confused thinking about before tax accounts. Thanks CardsFan.

[SecondCor521]

Quote:

Originally Posted by TonyClifton 1. The five year clock would start with the ICMA Roth, whereas it's not a factor with the Schwab Roth.

Not sure which five year clock you're referring to here, but the two IRS 5 year clocks of which I am aware are, I think, related to the first Roth you ever open in your name (so specific Roth accounts do not matter) or to the first day of the tax year in which you do conversions (and I don't think you're referring to conversions). So the above doesn't make sense to me.

[ownyourfuture]

Since Roth conversions are a huge part of this thread, I thought I’d ask here, instead of starting a new one.

Do Roth distributions count towards your modified adjusted gross income ?
I have a HD healthcare plan & have to watch my income very closely.

[SecondCor521]

Quote:

Originally Posted by ownyourfuture Since Roth conversions are a huge part of this thread, I thought I’d ask here, instead of starting a new one. Do Roth distributions count towards your modified adjusted gross income ? I have a HD healthcare plan & have to watch my income very closely.

You've used two different terms: conversion in your first sentence and distributions in your second sentence.

Conversions and distributions are two different things.

Roth conversions are moving money from a traditional IRA to a Roth IRA. The amount converted adds to MAGI for the tax year in which the conversion occurred. Roth conversions generally result in an increased tax liability and affect ACA subsidies.

Roth distributions are taking money out of or withdrawing money from a Roth IRA, and generally do not add to MAGI.

[RetireBy90]

Quote:

Originally Posted by TonyClifton Doing more research, I've discovered my work's 457 plan has a Roth option. The plan administrator is ICMA-RC which provides government plans. Evidently I can choose to direct both untaxed and taxed money into the 457 plan and its Roth option, subject to yearly allowable maximums, $26k currently. However, I see several reasons to forego creating a Roth option and instead go with moving old 401k money into the previously established Schwab Roth IRA: 1. The five year clock would start with the ICMA Roth, whereas it's not a factor with the Schwab Roth. I believe a previous post stated the 5 years are for first Roth. 2. The Schwab Roth allows the purchase of individual equities and a broad range of mutual funds. The ICMA plan only offers mutual funds and is not really a trading desk.One reason I moved my 401K to my Fidelity IRA 3. The 401k to Schwab Roth conversion is not subject to annual conversion limits.I believe you would need to verify with the plan administrator. My old 401K didn’t allow conversions, again a reason I moved the funds to my IRA Have I got that right?

See Bold Above, I would think best option is to move to a Schwab IRA then start conversions. Just my humble opinion.