DH concerned about taxes...what to do...

[CindyBlue]

My DH has expressed a concern about what to do with our income so taxes are minimized. We each have - or will have - three sources of income:

DH (age 75) now: RMD (Vanguard, 403b, at a mid to low risk investment level (don't know what it's called, but that's how it is presented to us)), Soc Sec, and Pension.

Me (age 66) now: Soc Sec and Pension. Hope not to have to take RMD (Vanguard, 403b (Vanguard, 403b, also at a mid to low risk investment level) until 72.

We have savings and checking accounts with too much money in them but that's another issue

He is wondering if we should take the money out of the 403b at Vanguard to put it in a savings account. He thinks/says we can now afford to pay the taxes that the RMDs are causing, so if we take the money out now and put it in a savings account then we won't have to pay as much taxes later when we are older (not sure I quite understand this but that's what he said.)

I told him I'd ask you folks.

 

[chassis]

Have you worked with a tax professional before? I suggest this. Ask around your network of friends and relatives for a referral. Given your apparently comfortable financial situation, the investment of a couple of hundred dollars in the tax professional's time would be worthwhile.

Given your comment that suggests lack of detailed familiarity with your holdings, I also suggest you pay for a consultation with a financial advisor.

Suspending your Social Security benefits might be an option: https://www.ssa.gov/benefits/retirement/planner/suspend.html

Changing your investments so that you receive as large a percentage of your income as possible from dividends is another option.

 

[CindyBlue]

Thank you!
I have tried to find a fee-based financial advisor for years, and they just seem to be in hiding. How does one find one? We really don't know anyone to ask.

Our tax lady (obviously) knows our income sources. She suggested this year that, since my Soc Sec was added to our income just this past April, that we each submit a form to have 7% taken out of each of our Soc Sec checks each month. Is that what you meant about the kind of information/advice that a tax professional can give us?

 

[rodi]

He is wondering if we should take the money out of the 403b at Vanguard to put it in a savings account. He thinks/says we can now afford to pay the taxes that the RMDs are causing, so if we take the money out now and put it in a savings account then we won't have to pay as much taxes later when we are older (not sure I quite understand this but that's what he said.)

I told him I'd ask you folks.

Disclaimer - I am *NOT* a tax expert in any way shape or form. The following is a spitball idea.

- Could you roll some of the 403b money into a ROTH? Pay current taxes on the withdrawal. Invest the rest in something that earns more than checking or savings. Roth withdrawals are not taxed - including the gains they make.

But - you need to figure out how much to do each year. We don't know what tax bracket you are in, or what kind of dollar values we're talking about... but a lot of people convert up to the top of their current tax bracket... so if you are in the 12% bracket - you withdraw enough to come close to the top of the 12% bracket to avoid the higher taxation on money that is above the 12% bracket.

You should also look at impacts to your state taxes. Some states treat retirement income very nicely.... Others (like mine) tax everything -pensions, SS, IRA withdrawals, etc.

 

[RunningBum]

Rather than withdraw your 403b I suggest you consider converting it to a Roth, spreading the conversions out for 6 years so that you don't have a large tax hit in one year. You can invest in whatever you like in the Roth--all earnings and withdrawals form there are tax free.

It would probably be best to have a tax pro look at your full situation with all the numbers to advise you.

While reducing taxes seems like a good goal, the real goal is to maximize your spending power over the rest of your life. Plus the amount of your inheritance if that is a priority to you. A simple example of what I mean: taking all of your money in cash and putting it in your fireproof safe bolted to your floor would give you 0 taxes for the rest of your life after you cash out, but you're not earning any money so that is not the best move. So think in terms of maximizing your money, with appropriate risk management.

 

[rodi]

Thank you!
I have tried to find a fee-based financial advisor for years, and they just seem to be in hiding. How does one find one? We really don't know anyone to ask.

Our tax lady (obviously) knows our income sources. She suggested this year that, since my Soc Sec was added to our income just this past April, that we each submit a form to have 7% taken out of each of our Soc Sec checks each month. Is that what you meant about the kind of information/advice that a tax professional can give us?

Not chassis - but I doubt that's what they meant. Withholding will make sure you don't run afoul of withholding rules and don't incur a penalty for not withholding enough. But it's not tax strategy.

The i-orp calculator might be able to give you the start of a withdrawal strategy to minimize taxes. Like anything - you need to input good data to get accurate results. It allows you to figure out optimum roth conversion. Disclaimer again - I haven't used it in a few years - but it was a good calculator when I used it.

https://www.i-orp.com/Plans/index.html

 

[CindyBlue]

Thank you!
I just sent an email to a fee - based financial advisor in a town close to us. Seems there now IS one nearby (and only one, by the way - the rest are 40-50 miles away!)

I do not understand "Roths" or "Roth conversions" - if anyone has some information about this I'd appreciate it. We each opened a Roth years ago but haven't done anything with it since - the fellow we opened it with switched companies and after that, we simply didn't pay any attention to it (I knew, not a good move, but that's what it is (sigh...))

For example (and I know that to many this will be a very ignorant question so I apologize in advance) does a Roth have the same chance to grow income that my 403b does?

I have some homework to do...

 

[RetiredHappy]

Thank you!
I have tried to find a fee-based financial advisor for years, and they just seem to be in hiding. How does one find one? We really don't know anyone to ask.

Our tax lady (obviously) knows our income sources. She suggested this year that, since my Soc Sec was added to our income just this past April, that we each submit a form to have 7% taken out of each of our Soc Sec checks each month. Is that what you meant about the kind of information/advice that a tax professional can give us?

You can check this out for fee-based CFP. This is a good place to start. https://www.garrettplanningnetwork.com/ One of the members here use a CFP from the network and has worked out well.

 

[CindyBlue]

Not chassis - but I doubt that's what they meant. Withholding will make sure you don't run afoul of withholding rules and don't incur a penalty for not withholding enough. But it's not tax strategy.

The i-orp calculator might be able to give you the start of a withdrawal strategy to minimize taxes. Like anything - you need to input good data to get accurate results. It allows you to figure out optimum roth conversion. Disclaimer again - I haven't used it in a few years - but it was a good calculator when I used it.

https://www.i-orp.com/Plans/index.html

Got it - thanks!

I've used iOrp for basic retirement info (of the "Can I retire" type of information) but I have no idea how to enter the information about Roth conversions.

Can the lady who does my taxes also do tax strategy? Or can a fee-based financial advisor do that? Or if not, what is the name of the tax stratgy job so I know what to look up?

 

[CindyBlue]

You can check this out for fee-based CFP. This is a good place to start. https://www.garrettplanningnetwork.com/ One of the members here use a CFP from the network and has worked out well.

Thank you!
Edited to add: All of these are 40 or more miles away in lousy traffic...sigh... We don't really want to have to drive that far, but understand that we might have to...

 

[rodi]

Ok... you have a few questions in there.

Roth is retirement funds - a form of IRA.

Traditional IRAs, 401ks, and 403bs you put money in 'pre-tax' and have to pay taxes on the money when you withdraw it.

Roths are retirement accounts that are post-tax... in other words you've already paid taxes on it.

Like traditional (pretax) retirement accounts - you can't just pull money out of savings or checking to invest in a Roth. It has to come from earnings - which you don't have since you are retired... OR from a Roth conversion. The Roth conversion is a trustee to trustee roll over that requires taxes to be paid on it. You pull money from your IRA or 403b, and put it in the Roth.

As far as having the same chance to grow income... It can be invested in funds, stocks, etc... same as an IRA/403b... But since it will be outside your 403b plan - you'll need to figure out what to invest it in. The investment options are likely to be different than your 403b plan.

I'm not 100% sure on 403b differences in ROTH conversion - I know they are 'like' 401ks... but there may be a nuance I am missing. At least one link I just googled suggested that not all 403bs can be converted /rolled to a Roth. So where you have your 403b, and the plan documents associated with it, are relevant data points.

You should start a list of questions for the fee based advisor. And do some research on your own, so you are prepared when you see him/her .

 

[CindyBlue]

Ok... you have a few questions in there.

Roth is retirement funds - a form of IRA.

Traditional IRAs, 401ks, and 403bs you put money in 'pre-tax' and have to pay taxes on the money when you withdraw it.

Roths are retirement accounts that are post-tax... in other words you've already paid taxes on it.

Like traditional (pretax) retirement accounts - you can't just pull money out of savings or checking to invest in a Roth. It has to come from earnings - which you don't have since you are retired... OR from a Roth conversion. The Roth conversion is a trustee to trustee roll over that requires taxes to be paid on it. You pull money from your IRA or 403b, and put it in the Roth.

As far as having the same chance to grow income... It can be invested in funds, stocks, etc... same as an IRA/403b... But since it will be outside your 403b plan - you'll need to figure out what to invest it in. The investment options are likely to be different than your 403b plan.

I'm not 100% sure on 403b differences in ROTH conversion - I know they are 'like' 401ks... but there may be a nuance I am missing. At least one link I just googled suggested that not all 403bs can be converted /rolled to a Roth. So where you have your 403b, and the plan documents associated with it, are relevant data points.

You should start a list of questions for the fee based advisor. And do some research on your own, so you are prepared when you see him/her .

Ohmygosh! I am so grateful for your time and effort in putting all this information to paper (er, computer screen! ) for us!

Our 403bs are in Vanguard. Mine is in the "VANGUARD INSTL TARGET RET 2020 FUND." (not sure about DH's, I have to go look that up!) I have no idea if they can be converted.

You are so right - I have a lot of homework to do. But you and the rest of these kind people here are giving me a lot of direction - I have to know what questions to ask in order to get answers

I've never been concerned about this. I was satisfied with the Vanguard 403b and our income sources - satisfied with the way things are, thinking that we set it up as best we could with the information we had at the time. And also thinking that now that we are retired we can't do much of anything about it. But hubby - for the first time!! - now is interested/concerned, and his questions are making me question my opinion. I want to try to get answers to his questions and either reassure him that we are doing what we should, or find a way to do better.

(Note: I've tried to get him interested in retirement financial concerns for years (I've been reading this forum for at least 8 years and been asking questions since 2017!) but with no success. This current interest is a good thing.)

 

[rodi]

Ok - I'm assigning you homework. Call Vanguard and ask them if your 403b is eligable to do Roth conversions. If the answer is yes - ask them the process. You might be able to roll the shares over - but maybe not (since there is 'instl' in the title - it may be fund only allowed within large institutional plans that they manage.)

You have your assignment... Now go gather data.

 

[SevenUp]

How are you with spreadsheets (e.g., Excel)?

See Roth IRA conversion - Bogleheads for some general thoughts and links to some tools that might be helpful.

 

[CindyBlue]

Ok - I'm assigning you homework. Call Vanguard and ask them if your 403b is eligable to do Roth conversions. If the answer is yes - ask them the process. You might be able to roll the shares over - but maybe not (since there is 'instl' in the title - it may be fund only allowed within large institutional plans that they manage.)

You have your assignment... Now go gather data.

I will!

I'm so glad - and grateful - to have specific actions to take!

Thank you!!

 

[CindyBlue]

How are you with spreadsheets (e.g., Excel)?

See Roth IRA conversion - Bogleheads for some general thoughts and links to some tools that might be helpful.

No good at all with spreadsheets! But I'm going to go look at the site - thank you!

 

[RunningBum]

I find fairmark to have clear and well-written info on many investment tax related topics.
https://fairmark.com/retirement/roth-accounts/

 

[Romer]

If they can't convert them, I would think they could be sold and then the cash converted. I would ask that as well

What is your husbands objective besides paying taxes now to avoid them later. The key here to understand it is to look at your tax brackets with the RMDs and evaluate if it will raise your tax bracket to take them out. You have to compare doing it over a single year or over several years

An example, say you are in the 22% or even 24% tax bracket, are these funds sufficient to push you into the 32 or 35% brackets? If so then you could be throwing away 10% of your money

Another example is if you are in the bottom of the 24% tax bracket and you convert enough to just stay in the 24% tax bracket, then you are not throwing anything away and your investments grow tax free. You do this over several years until you have accomplished what you want to do

I don't know your situation so just throwing out two generic examples to give you something to think about

Or do you have so much money that paying the extra tax bill isnt a big deal and your husbands objective is to leave the money tax free for your kids?

I am not a tax expert or financial advisor nor an expert but I think thee Roth conversion mentioned above is the best way. You can use that money or let it sit growing tax free for whomever uses it later

 

[SevenUp]

No good at all with spreadsheets! But I'm going to go look at the site - thank you!

In that case, the "RPM" one is probably too much to tackle now.

The "toolbox" one isn't simple, but between the screenshots in the linked site and the Instructions tab it may be usable by you. Apparently it works better in Excel than other tools, e.g., Google Sheets.

 

[target2019]

If the 403(b) isn't eligible for Roth conversions (it probably is), then you request Vanguard to rollover the 403(b) to an IRA. The IRA is called a Rollover IRA.

Then you can do Roth conversions from that Rollover IRA.

But as you know already, there are more aspects to a financial plan with tax strategy. I would be careful with financial advisers, as the ones I interviewed along the way did not do taxes, but would refer you to a "partner" of theirs.

The RMD which will be forced from your 403(b) or Rollover IRA is definitely something to consider. Let your DH know he was on the right track by thinking of paying taxes now instead of later.

The Roth IRA conversion is similar to that, but it would be done in a controlled fashion over a number of years, and the money is then held in a tax-free account (the Roth IRA) going forward.

Ultimately what makes sense is driven by the other income you have, and when it comes into play. It is a simple task for a tax professional since their software has what-if capability and can use your current tax situation to project out year-by-year.

 

[chassis]

@CindyBlue speak on the telephone with your close friends and your relatives. Ask them if they know anyone who is trustworthy and who offers financial advisory services for a fee. Emails won’t get you very far, very fast. Speak with other humans.

Your tax professional is not giving you what it seems like you are looking for. I interpret from your comments that you are looking for the best tax strategy for you and DH. Ask your tax professional for his/her advice for a tax optimization strategy. If you hear static on the phone, or you get the deer in the headlights look from him/her, find a new tax professional.

 

[CindyBlue]

@CindyBlue speak on the telephone with your close friends and your relatives. Ask them if they know anyone who is trustworthy and who offers financial advisory services for a fee. Emails won’t get you very far, very fast. Speak with other humans.

Your tax professional is not giving you what it seems like you are looking for. I interpret from your comments that you are looking for the best tax strategy for you and DH. Ask your tax professional for his/her advice for a tax optimization strategy. If you hear static on the phone, or you get the deer in the headlights look from him/her, find a new tax professional.

Thank you!
We have actually asked many friends for their recommendations for a fee based financial advisor, but so far, no one knew anyone who gives financial advice such as we are looking for for a fee - they all need you to deposit your money with them first. We've actually gone to speak to three of the companies that were recommended, for a preliminary interview, hoping to get some help, but they want the money and didn't give out any really useful information. Finding a fee based advisor is tough around here - we don't know why, since it's a relatively prosperous area.

But now I'll research and ask friends for a "tax professional" recommendation!

Seriously, I've gotten more help here than anywhere. I now have a direction to go and some questions to ask - I didn't even know what questions to ask before this!

 

[CindyBlue]

Ok, I've been doing some researching while waiting for the time I can start calling. I may have found a tax professional in my own town that has a good reputation (yay!)

I still don't understand one thing - if we roll our Vanguard 403b into a Roth, is it the same plan (the VANGUARD INSTL TARGET RET 2020 FUND) with the same growth rate and risk rate, just with different tax implications? I can't seem to find an answer for this question. I've looked around the Vanguard site, too, but if the answer is there, I can't find it.

I feel pretty safe with this Vanguard account that we have, and am cautious about changing it.

 

[latexman]

Google "registered fiduciary near me". Scroll past the hits marked Ad down to the "People also ask" questions. That's where you will learn worthwhile things, besides here, of course. The section expands with more questions and answers the more you click on them. I think the SEC has a tool to find advisers and fiduciaries.

 

[RunningBum]

I still don't understand one thing - if we roll our Vanguard 403b into a Roth, is it the same plan (the VANGUARD INSTL TARGET RET 2020 FUND) with the same growth rate and risk rate, just with different tax implications? I can't seem to find an answer for this question. I've looked around the Vanguard site, too, but if the answer is there, I can't find it.

Normally I'd say yes, but for your own Roth I don't know that you can roll an "Institutional" fund over. It might get changed to "Vanguard Target Retirement 2020 Fund (VTWNX)", which is essentially the same but with a slightly higher internal fee.