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

[RetiredHappy]

Yep, thank you - that we knew! I guess the question is...pay now or pay later, and what is the advantage of each?

It all depends and none of us can answer that question for you without all the numbers, and a bit of a gamble that one is a better decision than the other.

 

[harllee]

Cindy, don't know if anyone else has mentioned this but one way to reduce RMD distributions and thereby reduce taxes is to make charitable gifts from your IRA. Any amount you give each year to charity from an IRA after age 70.5 reduces the amount of RMD you have to take from your IRA. Under the tax rules you can do this up to a max of $100,000 per year. So if you are doing any charitable gifts, like to your Church, Red Cross, etc. do them from your husband's IRA instead of from your checking account. There is info on the Vanguard website how to do this. Basically you have Vanguard write a check from your IRA to the charity, send it to you and then you mail it to the charity with a letter that is from you. Then you reduce your RMD by the amounts you gave to charity.

 

[target2019]

Yep, thank you - that we knew! I guess the question is...pay now or pay later, and what is the advantage of each?

What tax bracket are you in now, Cindy?

The tactic is to stay in a lower bracket, pay taxes on a conversion to Roth IRA, and avoid the additional taxes that will come when you enter a higher tax bracket.

 

[pb4uski]

....1. Can we transfer RMD money directly from the Vanguard 403b account to the Vanguard Roth account? (I have a message in to Vanguard about this.)
2. Are we even allowed to add to our Roth at all, now that we are retired?
3. Should we (can we?) set up a yearly 403b rollover to the Roth account even if we can't roll the RMD money directly into it (i.e., separately from the RMD money?)

It's getting clearer...

1. No.
2. If you no longer have any earned income (wages) you can't make contribution to your Roth but you can do conversions (transfer money from 403b to Roth and pay the income tax on the amount transferred).
3. No. But you can transfer the RMD to a taxable brokerage account and invest it however you want... you don't have to spend it. You can invest it in the same type of investment that it was in in the 403b account or something different.

 

[pb4uski]

Yep, thank you - that we knew! I guess the question is...pay now or pay later, and what is the advantage of each?

The conventional advice is to look at your "ultimate" tax bracket... once all pensions and SS are going... as any RMDs would be in that or higher tax brackets. It sounds like you are both collecting SS and any pensions already? If so, then you are probably already in your ultimate tax bracket and might consider Roth conversions in additions to RMDs to the top of that tax bracket.

Another possible consideration is your kids tax bracket since if they inherit the 403b then they'll need to drain it within 10 years and if the heirs are financially successful they may be in an even higher tax bracket.

It's very situational.

 

[brett]

We worked with a tax professional for several years. The benefits far exceeded the professional fees. Got set up, now we follow the plan on our own. Saved us a fair amount of tax over the past ten years.

 

[Sunset]

..... The idea of opening a "regular" Vanguard account hadn't even occurred to me! Now we have to figure out if we want our money to be very safe or risk it in the market along with our 403b money...
......

Just remember that pure savings earning interest has a hidden danger called inflation. I have some CD's earning 1% right now, so since inflation is currently around 4% , it means I'm really losing 3% a year in spending power.

So that $100K car today, will cost $104K next year, but my CD will only be worth $101K

If the money is currently "extra" and you don't see that you will need it within a few years, then my personal rule is to invest in the market.
Over any 20 yr span, the market has not lost money, just be diversified.

 

[CindyBlue]

What tax bracket are you in now, Cindy?

The tactic is to stay in a lower bracket, pay taxes on a conversion to Roth IRA, and avoid the additional taxes that will come when you enter a higher tax bracket.

Does this mean marginal and effective tax rates? If so, the marginal is 12% and the effective is 11%. (I mentioned I was ignorant...sigh...)

I'm thinking that the only way it would get higher is when I have to take RMDs in 6 years, right? (unless, God forbid, we start w*rking again (smile!))

 

[N02L84ER]

Does this mean marginal and effective tax rates? If so, the marginal is 12% and the effective is 11%. (I mentioned I was ignorant...sigh...)

I'm thinking that the only way it would get higher is when I have to take RMDs in 6 years, right? (unless, God forbid, we start w*rking again (smile!))

or when one of you dies and you have to switch to filing as single instead of married filing jointly.

 

[OldShooter]

Just a comment on looking for a "fee based" advisor. A year or two ago I used one of the links someone gave to look for one, mostly out of curiosity. The ones around me all had their fee based on assets under management, not hourly.

That gets confused a lot. In the industry "fee based" is used to differentiate from "commissioned salesperson." The fee can be hourly, by the job (financial plan) or AUM. Those who offer hourly and by the job are typically doing it to develop AUM business from the clients they attract.

Nothing wrong with any of that, but it can be confusing.

 

[CindyBlue]

or when one of you dies and you have to switch to filing as single instead of married filing jointly.

Ohhh...never thought of that...

 

[ivinsfan]

Ohhh...never thought of that...

You'll also lose one SS check when that happens and the RMD number will change as well. I have no idea how your pensions are structured.



Start your reading CindyB...

 

[pb4uski]

Does this mean marginal and effective tax rates? If so, the marginal is 12% and the effective is 11%. (I mentioned I was ignorant...sigh...)

I'm thinking that the only way it would get higher is when I have to take RMDs in 6 years, right? (unless, God forbid, we start w*rking again (smile!))

It would probably make sense to consider doing Roth conversions to the top of the 0% preferenced income tax bracket (for qualified dividends and LTCG).

For 2020, that would be federal taxable income of $80,800 ($250 below the top of the 12% tax bracket). Add in the $27,800 standard deduction for MFJ where both are over 65 and $600 for charitable contributions even if you don't itemize and that would be $109,200 of income.

You can test various option using the What-If worksheet in turboTax if you use TurboTax to prepare your taxes or the dinkytown calculator https://www.dinkytown.net/java/1040-tax-calculator.html

 

[Exchme]

@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.

Very true! We asked our CPA and realized she didn't have a clue how to manage this. I had to explain to her that IRMAA rates are based on the earnings from two years prior, she was astonished. So the initials behind the name do not necessarily mean competence at what you need.

 

[pb4uski]

^^^^ To be fair, what we are referring to is a very narrow niche of practice that most CPAs don't deal with... even CPAs who specialize in taxes.

I think the best alternative would be to try to find a CPA with a PFS (Personal Financial Specialist) and even then they might not be familiar with some of the nuance unless they specifically practice in retirement planning.

In fact, this is such a narrow niche that if you asked 100 CPAs I would be surprised if you would find one that is familiar with it.... there is way too much money chasing corporate audits, corporate taxes, consulting, M&A, SEC practice, etc to make it worthwhile.

 

[CindyBlue]

You'll also lose one SS check when that happens and the RMD number will change as well. I have no idea how your pensions are structured.



Start your reading CindyB...

Hmm...if whoever is left loses the partner's social security check - and also half the other guy's pension - wouldn't that make the income lower therefore less tax hit?

 

[CindyBlue]

Very true! We asked our CPA and realized she didn't have a clue how to manage this. I had to explain to her that IRMAA rates are based on the earnings from two years prior, she was astonished. So the initials behind the name do not necessarily mean competence at what you need.

Wow...I guess it's too much of a specialty thing...

 

[CindyBlue]

It would probably make sense to consider doing Roth conversions to the top of the 0% preferenced income tax bracket (for qualified dividends and LTCG).

For 2020, that would be federal taxable income of $80,800 ($250 below the top of the 12% tax bracket). Add in the $27,800 standard deduction for MFJ where both are over 65 and $600 for charitable contributions even if you don't itemize and that would be $109,200 of income.

You can test various option using the What-If worksheet in turboTax if you use TurboTax to prepare your taxes or the dinkytown calculator https://www.dinkytown.net/java/1040-tax-calculator.html

I'm sorry - and sad - to say that none of this makes any sense to me. What is "...doing Roth conversions to the top of the 0% preferenced income tax bracket (for qualified dividends and LTCG)" ?

 

[CindyBlue]

You'll also lose one SS check when that happens and the RMD number will change as well. I have no idea how your pensions are structured.



Start your reading CindyB...

Working on it!

 

[ivinsfan]

Hmm...if whoever is left loses the partner's social security check - and also half the other guy's pension - wouldn't that make the income lower therefore less tax hit?

This will help mitigate the cost of filing status changing from filing jointly to filing singly.

 

[pb4uski]

I'm sorry - and sad - to say that none of this makes any sense to me. What is "...doing Roth conversions to the top of the 0% preferenced income tax bracket (for qualified dividends and LTCG)" ?

Think of it as converting to the top of the 12% tax bracket.

 

[CindyBlue]

Think of it as converting to the top of the 12% tax bracket.

Meaning...that I convert enough to get it so my RMDs from the 403b combined with my other income puts me at the top of the 12% bracket but not enough to put me over the 12% bracket?

 

[Telly]

CindyBlue, I don't know what your approach to LTC (Long Term Care) is, but SS + Pension(s) alone may not be enough to pay for decent LTC if you are self-insuring. Around here, $100k a year would be a good planning number for one patient. And I would expect it to increase far faster than the inflation rate! DW and I are self-insuring, so we will want to keep a pretty good $$$ buffer for the future! So when I get to RMD age, we will probably re-invest most of the RMD into a taxable account whose goal is to generate minimal year-to-year taxes, and grow untouched. And take the tax hit when and if we need to sell some in the future.

 

[CindyBlue]

CindyBlue, I don't know what your approach to LTC (Long Term Care) is, but SS + Pension(s) alone may not be enough to pay for decent LTC if you are self-insuring. Around here, $100k a year would be a good planning number for one patient. And I would expect it to increase far faster than the inflation rate! DW and I are self-insuring, so we will want to keep a pretty good $$$ buffer for the future! So when I get to RMD age, we will probably re-invest most of the RMD into a taxable account whose goal is to generate minimal year-to-year taxes, and grow untouched. And take the tax hit when and if we need to sell some in the future.

That is a very valuable consideration! Thank you so much for providing this perspective.

 

[Sunset]

Meaning...that I convert enough to get it so my RMDs from the 403b combined with my other income puts me at the top of the 12% bracket but not enough to put me over the 12% bracket?

Meaning since you are in the 12% tax bracket, do roth conversions to the top of that 12% bracket, each year.
It probably does not make sense to do so much conversion in a year that you go into the next tax bracket.

Whatever is left in the 403b will come out as RMD's and you don't get a choice about that.