Gap Year Income (from age 59 – 60) Before Pension Starts at Age 60 – Where to Pull Money From?

[G-Man]

What do you expect your tax on RMDs to be? Probably not worth it if you're in the 22%/25% range before Roth conversions.

Before RMDs (before age 75 for us), in the 22%/25% marginal tax bracket. At age 75 when RMDs keep in, 28% marginal tax bracket. That is what the RightCapital retirement planning software is predicting.

 

[wearefinishedworking]

Regarding the use of HSA for premiums: isn't that only allowed for a lay-off? My understanding is that the HSA can only be used for a lay-off or later for Medicare premiums?

 

[G-Man]

Regarding the use of HSA for premiums: isn't that only allowed for a lay-off? My understanding is that the HSA can only be used for a lay-off or later for Medicare premiums?

Hmm. I need to check on that because the RightCapital retirement planning software is using HSA dollars to pay for premiums before Medicare kicks in.

This is interesting. Maybe others can weigh in.

 

[G-Man]

Regarding the use of HSA for premiums: isn't that only allowed for a lay-off? My understanding is that the HSA can only be used for a lay-off or later for Medicare premiums?

It looks like you are correct according to this thread on bogleheads. My retiree healthcare premiums before age 65 is not HSA egibile. Now I need to determine whether to continue to max out my HSA contributions before retiree healthcare kicks in next year.

Retiree health insurance premiums reimbursable from HSA? - Bogleheads.org

 

[TheWizard]

I like the idea of taking money out of that deferred compensation 401(k) every year in retirement, either for living expenses or Roth conversion in the years prior to RMD.
Note: you can request zero tax withholding for Roth conversions, unlike withdrawals to your checking account.

With proper income modeling over the next 15-20 years, you can determine reasonable amounts to Roth convert each year to levelize your AGI to a degree and avoid any nasty torpedoes at age 70 or 75.

Note: I'm not one of those who advocates doing Roth conversions to the top of your current tax bracket. Sometimes you need to go a bit into the next higher bracket to make a decent dent in your tax-deferred balance...

 

[G-Man]

I like the idea of taking money out of that deferred compensation 401(k) every year in retirement, either for living expenses or Roth conversion in the years prior to RMD.
Note: you can request zero tax withholding for Roth conversions, unlike withdrawals to your checking account.

With proper income modeling over the next 15-20 years, you can determine reasonable amounts to Roth convert each year to levelize your AGI to a degree and avoid any nasty torpedoes at age 70 or 75.

Note: I'm not one of those who advocates doing Roth conversions to the top of your current tax bracket. Sometimes you need to go a bit into the next higher bracket to make a decent dent in your tax-deferred balance...

Thanks for responding. I would like clarity on your statement below:

"Note: you can request zero tax withholding for Roth conversions, unlike withdrawals to your checking account."

Currently I would use the Rule of 55 to avoid the 10% early withdrawal but still have the 20% mandatory tax withholding when withdrawing the $75k from my 401k.

Are you suggesting avoiding the 20% mandatory tax withholding, by doing a Roth conversion instead? If yes, would I have immediate access to the $75k in my Roth account. In addition, when would I need to pay taxes on the Roth conversion? Could I do another withdrawal from my 401k and have the entire amount withheld for taxes to pay for the conversion?

Please advise.

 

[G-Man]

Thanks for responding. I would like clarity on your statement below:

"Note: you can request zero tax withholding for Roth conversions, unlike withdrawals to your checking account."

Currently I would use the Rule of 55 to avoid the 10% early withdrawal but still have the 20% mandatory tax withholding when withdrawing the $75k from my 401k.

Are you suggesting avoiding the 20% mandatory tax withholding, by doing a Roth conversion instead? If yes, would I have immediate access to the $75k in my Roth account. In addition, when would I need to pay taxes on the Roth conversion? Could I do another withdrawal from my 401k and have the entire amount withheld for taxes to pay for the conversion?

Please advise.

Can someone answer the questions in this post.

 

[TheWizard]

Thanks for responding. I would like clarity on your statement below:

"Note: you can request zero tax withholding for Roth conversions, unlike withdrawals to your checking account."

Currently I would use the Rule of 55 to avoid the 10% early withdrawal but still have the 20% mandatory tax withholding when withdrawing the $75k from my 401k.

Are you suggesting avoiding the 20% mandatory tax withholding, by doing a Roth conversion instead? If yes, would I have immediate access to the $75k in my Roth account. In addition, when would I need to pay taxes on the Roth conversion? Could I do another withdrawal from my 401k and have the entire amount withheld for taxes to pay for the conversion?

Please advise.

What I've been doing past several years is a Roth conversion in December once I have a good idea of my other income for the year. I have my custodian do zero Federal withholding with no problem.
Then I use EFTPS to make a single quarterly tax payment for the year from my checking account.
I have withholding in place for my normal income streams so this single estimated payment covers the extra tax due to the Roth conversion.

It does seem like a loophole that I could do a Roth conversion with zero w/h and then shortly after take those funds out of the Roth for spending.
That's not what I do.
Perhaps someone else can comment on the viability of this strategy.

As for paying the taxes on a Roth conversion, yes you can do another withdrawal from tax-deferred and have 100% withheld if that's what you want...

 

[SevenUp]

If yes, would I have immediate access to the $75k in my Roth account.

Assuming you are under age 59.5, "yes but you would incur a penalty if your withdrawals exceed the amount of Roth contributions you have made". See the Treatment of distributions table.

In addition, when would I need to pay taxes on the Roth conversion?

That depends on where you stand relative to your most favorable Safe harbor to avoid underpayment penalties.

Could I do another withdrawal from my 401k and have the entire amount withheld for taxes to pay for the conversion?

Yes, if your plan allows that.

 

[G-Man]

Assuming you are under age 59.5, "yes but you would incur a penalty if your withdrawals exceed the amount of Roth contributions you have made". See the Treatment of distributions table.

That depends on where you stand relative to your most favorable Safe harbor to avoid underpayment penalties.

Yes, if your plan allows that.

Would the same rules apply if the conversion is from a Traditional 401k to a Roth 401k. Our 401k plan has a Roth 401k option and allows in-plan Roth conversion to the Roth 401k.

Essentially here is what I'm trying to accomplish based on the fact that I'm under the age of 59 1/2 and my Roth IRA has only been opened for only 3 years. I have no dollars in the Roth 401k.

1. Have immediate access to the conversion amount ($75k) because my Roth IRA has only been opened for 3 years and I have no dollars in the Roth 401k.
2. Be able to avoid the 10% withdrawal penalty because I am under the age of 59 1/2.
3. Be able to declare zero tax withholdings for the initial conversion with the option of taking another withdrawal to pay for all the taxes due on the conversion at the end of the year.

FYI. See the attached photo. It's you're understanding that I would follow the row circled in red.

Thanks

 

[SevenUp]

FYI. See the attached photo. It's you're understanding that I would follow the row circled in red.

View attachment 51748

Thanks

No, your situation is the row above the circled one: "Conversions, taxable portion" because your converted amount would be taxable income in the year of conversion.

The circled row applies to Backdoor Roth conversions, when the original IRA contribution was not deductible and thus the conversion of that amount is nontaxable.

 

[G-Man]

No, your situation is the row above the circled one: "Conversions, taxable portion" because your converted amount would be taxable income in the year of conversion.

The circled row applies to Backdoor Roth conversions, when the original IRA contribution was not deductible and thus the conversion of that amount is nontaxable.

Ok.. Then I would pay a 10% penalty because I'm under 59 1/2 and the 5-year holding period for the conversion has not been met. Once again, I only had a Roth IRA opened for 3 years.

I'm I interpreting the chart correctly?

 

[SevenUp]

Ok.. Then I would pay a 10% penalty because I'm under 59 1/2 and the 5-year holding period for the conversion has not been met. Once again, I only had a Roth IRA opened for 3 years.

I'm I interpreting the chart correctly?

Yes.

Thus, if you want to spend the $75K immediately, just use the rule of 55 to take it from your 401k (assuming your plan allows partial distributions) without penalty and spend it.

 

[G-Man]

Yes.

Thus, if you want to spend the $75K immediately, just use the rule of 55 to take it from your 401k (assuming your plan allows partial distributions) without penalty and spend it.

yes. I could do that. However, I will be hit with a mandatory 20% tax withholding at the time of withdrawal.

 

[Al18]

To reduce taxes, you may want to withdraw 50% from your 401K and take the remaining from you savings account. Or choose whatever % you decide on. This will insure you're not having extra taxes withheld.

 

[G-Man]

To reduce taxes, you may want to withdraw 50% from your 401K and take the remaining from you savings account. Or choose whatever % you decide on. This will insure you're not having extra taxes withheld.

That is an option. Thanks

 

[Global Wizzo]

I am currently 58 and receiving a retirement severance package until next year (2025). Next year, I will turn 59 and need to determine where my source of income will come from to fill the gap (59-60) before my pension starts at age 60. I need about $60k to fill the gap.

Here are the options I have:

• Use my Taxable Account (checking/saving account) – This will deplete all the funds I have in my checking account. Not sure if that is good idea because I will not have immediate access to any emergency funds.
• Use the Fixed Income bucket within my 401k – I have carved out a fixed income bucket within my 401k that has about $75k.
• Turn on my pension at age 59 and incur a small reduction in the yearly amount – At age 60, I am eligible for my pension with no reduction. My pension does not have a cola adjustment. If I turn on my pension at age 59, it will reduce my yearly amount by $3k per year. Over a 30-year time period, that is $90k.

I modeled these scenarios out in the RightCapital retirement planning software and Option 3 gives me the larger end-of-plan balance.

Would love to hear from others on what you would recommend. I’m leaning toward Option 3 but can’t stomach the idea of not getting my full pension at age 60.

Thanks,

My scenario may not help at this point. I built up my cash account to cover 2+ years until I started SS and RMDs. Pulled the plug at 67. Like you I needed 60-70K/yr. Good luck.

 

[orbops]

The rule of 55 seems appropriate for you. What about just withdrawing enough from your Fixed income portion to last for 6 months, and then you'll be at 59 1/2. From that point moving forward, you wouldn't have to worry about a penalty when withdrawing funds from your 401K.

Concerning a Roth conversion, I would suggest starting the Roth conversion after you're 59 1/2, so that taxes can be deducted immediately. I always do my small Roth conversion in December, so that I have a good idea of where I am in my tax bracket. In my personal situation, by doing Roth conversions until I'm 70 will cut my RMD by 50%.

 

[Rambler]

Someone mentioned getting a part time job. I haven’t seen you note that either as a positive or a negative. Would it be possible to consult with your current firm? Would you be averse to doing something part time for less $ per hour, but something to soften the sting during that gap year? Or are there plans and goals you need to accomplish that won’t allow this?

Note: I’ve been around here since 2007, and used to post a lot, but lately I do more lurking than posting…even my lurking has dwindled lately…too busy being retired to hang around the retirement forums. Seriously though, I have thought about a PT job from time to time, doing something much less involved than I used to do, but potentially more physical. Alas, my body is breaking down, and my poor feet and ankles have had enough by the time I’ve walked or jogged the dogs three or four miles each day. Whatever you choose to do, I hope it works out well for you.

 

[PappaChris]

As I mentioned in my post above, your 401K provider would automatically withhold 20% for Federal taxes. They will ask you if you want to withhold more for Federal taxes or withhold some for state taxes.

With the dramatic increase in stock values this year (up 16% this year), you’re stock/fixed income ratio is likely out of proportion and you sell stock funds to bring the ratio back into control.

I avoid the 20% withholding roll your distribution from your 401k to an IRA then take your distribution from the IRA. The IRA does not require withholding.

 

[MdaPetralia]

I avoid the 20% withholding roll your distribution from your 401k to an IRA then take your distribution from the IRA. The IRA does not require withholding.

+1

 

[SevenUp]

I avoid the 20% withholding roll your distribution from your 401k to an IRA then take your distribution from the IRA. The IRA does not require withholding.

True, but a 10% penalty may be assessed on IRA distributions prior to age 59.5. The 20% withholding could be refunded when filing, but not the 10% penalty.