IRA-401k Trap :)

[ERhoosier]

Yes, in your case the biggest change would probably be the tax tables. Also, taking one personal exemption rather than two will mean a further increase in taxable income of $3,950, and if you are taking the standard deduction (rather than itemizing) the change from MFJ to single will mean the loss of $6200 in deductions (all figures for 2014).

For couples who are now in the 15% bracket and the survivor is pushed into the 25% bracket, the increase in taxes can be dramatic (increased tax rate, decreased deductions, loss of 0% CG and dividend treatment.).

And there's the very real potential that those rates will increase in coming years to service the massive Fed debt- especially when current low interest rates rise back towards historical norms.

 

[ajs56]

Yes, in your case the biggest change would probably be the tax tables. Also, taking one personal exemption rather than two will mean a further increase in taxable income of $3,950, and if you are taking the standard deduction (rather than itemizing) the change from MFJ to single will mean the loss of $6200 in deductions (all figures for 2014).

For couples who are now in the 15% bracket and the survivor is pushed into the 25% bracket, the increase in taxes can be dramatic (increased tax rate, decreased deductions, loss of 0% CG and dividend treatment.).

Thanks again. I need to do some projections with more focus on tax bracket implications. Rough idea in my head right now is saying our tax bracket will stay the same over the long haul for the most part, but I will look at what might happen to that if one of us passes.

Thanks for sharing your thoughts on this.

 

[ajs56]

We should have been expecting it if we were paying attention since it was pretty obvious.

While we were saving tax-deferred while working it was easy to overlook that when we withdraw that the piper would need to be paid. Out of sight, out of mind and a long ways down the road.

It is very unlikely that I will come out poorly (marginal rates during withdrawal are higher than when i was working) and highly likely that I will come out ahead (marginal rates lower when withdrawn than when contributed) so I still think it was a good thing for me to do ---- but I still wish I didn't have to pay the piper at all!!

This is pretty much how I see it also. I am going to consider the possible tax implications of one spouse passing early, and whether that might make roth conversions attractive. But I'm not seeing much other reason to even consider the conversions. As you say, at some point the piper must be paid, though let's pay him as little as possible...

 

[MaddMaxx]

Its a concern for me as well, as my company matches 100% up to 15% of my pay. I expect to have close to 1.7 million in my 401k when I retire in 18 years.

 

[pb4uski]

Wow!!! 100% on 15%? That is a great deal. I've never heard of such a rich deal.

 

[jollystomper]

Why do some consider this a "trap"? It is not like one didn't know that taxes would be due on this later. I went into it knowing full well that taxes would be paid later. I have no problem being taxed at the 15% bracket (particularly with the added appreciation via 401K company match and the last 30 years of the market), as the salary deferral kept us out of brackets greater than 25%.

 

[rodi]

Something tells me that the OP has a product to sell that is a "solution" to this problem.

I don't know about that - but several of LongPrime's posts have shown him to have a different view than the majority here. This thread is just another example.

Like anything on the internet - it's good to hear both sides of an argument, filter out the garbage and misinformation, and make up your own mind. I don't think LongPrime is going to change many opinions... but if what he says is working for him... so be it.

 

[Options]

And there's the very real potential that those rates will increase in coming years to service the massive Fed debt- especially when current low interest rates rise back towards historical norms.

+1
Bernstein, among others, has said as much. Big issue for those of us delaying to SS is the interplay with RMD's. However, I plan to Roth convert for a few years to beat future tax increases as much as to avoid the tax torpedo at 70.

 

[GrayHare]

I had not known ordinary-rate taxes would be due on tIRA/401k withdrawals. I had thought the investments retained their character in a tiered structure like other entities employ. Instead the retirement accounts convert what would have been tax-favored capital gains into ordinary income. Ouch!

 

[REWahoo]

I had not known ordinary-rate taxes would be due on tIRA/401k withdrawals. I had thought the investments retained their character in a tiered structure like other entities employ. Instead the retirement accounts convert what would have been tax-favored capital gains into ordinary income. Ouch!

Enough to want to change the spelling of your last name, eh?

 

[GrayHare]

Enough to want to change the spelling of your last name, eh?

I doubt that'll work, I think a time travel machine is needed.

 

[pb4uski]

I had not known ordinary-rate taxes would be due on tIRA/401k withdrawals. I had thought the investments retained their character in a tiered structure like other entities employ. Instead the retirement accounts convert what would have been tax-favored capital gains into ordinary income. Ouch!

True.... but the 15% ordinary marginal rate that will apply to much of mine withdrawals is the same or lower than capital gain tax rates while I was working so even at ordinary rates I am still ahead of having not deferred, paid the taxes and invested in taxable accounts.

Federal Capital Gains Tax Rates, 1988-2013 | Tax Foundation

 

[LongPrime]

I don't know about that - but several of LongPrime's posts have shown him to have a different view than the majority here. This thread is just another example.

Like anything on the internet - it's good to hear both sides of an argument, filter out the garbage and misinformation, and make up your own mind. I don't think LongPrime is going to change many opinions... but if what he says is working for him... so be it.

I really try to seek All options available. Life is never a straight line. A boring life. And as I sit here after the hospice visit for mom, I really don't have much to do except to add some weird thinking to common problems that and common results. I am looking for uncommon results (bigger retirement) for the our common problem of FIRE. If you think I am on this forum for traditional solutions, then you very wrong.

 

[robnplunder]

Uncle Sam says, "You can pay me now, or you can pay me later."

What trap? In my case, it's "later" at much lower tax rate.

But then again, I am sure there are some (maybe, one or two) among us who want to pay as much tax as they can in order to help US government's budget problem. Anyone?

 

[nokkieny]

Money I can't touch for 30 years, in a government created account structure? I would be stupid not to consider this a trap. Wanting to retire much earlier than I can touch the money, my goal for deferred retirement has been moderation. Save enough outside of retirement accounts and hopefully be able to pull from tax deferred at the lowest tax rate (hopefully that rate is still low). However, in the meantime if I do have years of lower income I do plan to covert to roth as much as possible.
One thing I highly regret is not contributing to a roth when my income was lower, I would love to have a little bit of tax free money that I could invest aggressively while I am still young.

 

[pb4uski]

Money I can't touch for 30 years, in a government created account structure? I would be stupid not to consider this a trap. Wanting to retire much earlier than I can touch the money .....

When you made those contributions and accepted the benefit of not paying taxes on that income, did you understand that that when you did eventually withdraw it that it would be taxable income? and that if you accessed that money before you were 59 1/2 that there would be a penalty?

If so, then what is the problem and why is it a trap? If not, then shame on you for not paying attention.

Similarly, assuming you have known all along that you want to retire before 59 1/2 what is the problem? You just need to plan ahead. Stop whining.

 

[nokkieny]

When you made those contributions and accepted the benefit of not paying taxes on that income, did you understand that that when you did eventually withdraw it that it would be taxable income? and that if you accessed that money before you were 59 1/2 that there would be a penalty?

If so, then what is the problem and why is it a trap? If not, then shame on you for not paying attention.

Similarly, assuming you have known all along that you want to retire before 59 1/2 what is the problem? You just need to plan ahead. Stop whining.

I don't know for sure its trap, but with the way things are going I feel like tax rates will probably go up. However, the tax savings help immensely now and I consider it diversification. I have no plans whatsoever to have more than 25% of my net worth in tax deferred accounts. The idea is that when I do withdraw I don't have to withdraw so much that I am getting into higher tax brackets, it will sorta just be like extra money.
But yes my accountant is suggesting I invest elsewhere and I know it is important not to rely on IRAs.

 

[daylatedollarshort]

Money I can't touch for 30 years, in a government created account structure? I would be stupid not to consider this a trap. Wanting to retire much earlier than I can touch the money, my goal for deferred retirement has been moderation. Save enough outside of retirement accounts and hopefully be able to pull from tax deferred at the lowest tax rate (hopefully that rate is still low).

Thirty years before 59.5 is 29.5, so most people aren't going to be able to retire at that age and expect to live off retirement account money.

There are many loopholes that allow people to access retirement account money before age 59.5. Those who retire the year they turn 55, ten years earlier than 65, or later may be able to make penalty free withdrawals from their last employer 401Ks (plus any IRAs rolled over into that account).

 

[Alan]

Thirty years before 59.5 is 29.5, so most people aren't going to be able to retire at that age and expect to live off retirement account money.

There are many loopholes that allow people to access retirement account money before age 59.5. Those who retire the year they turn 55, ten years earlier than 65, or later may be able to make penalty free withdrawals from their last employer 401Ks (plus any IRAs rolled over into that account).

+1

There is also the 72t rule that allows one to withdraw penalty free from IRAs well before age 59.5. I have never thought that the IRA and/or 401k money was legally untouchable without penalty until 59.5.

 

[Sirka]

More taxes on the RMDs

Something to consider, .. If the couple is MFJ and near the top of the 15% bracket, a single surviving spouse can find herself well into the 25% bracket--paying 10% more taxes on the RMDs and also losing all the zero-tax CG and dividends--it can be a big hit.

Thanks, I will add this reason to my Roth Conversion list. We are near the top of the 15% bracket every year, because we convert to Roth. When DW starts to collect SS we will have to stop conversions.

Nevertheless 401k is a great way to delay paying taxes util it's manageable.

 

[Chuckanut]

IRA's, 401K's, 403b's, etc. are tools we can use to help insure our financial future. Like any tool we have to choose the best one for the job. No tool may be perfect, but we try and choose the best.

 

[unno2002]

[FONT=&quot]The "trap" I see with IRA/401k type accounts is the requirement to start withdrawal when you reach age 70 1/2.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]In essence the “baby boom” generation began in 1946. The leading edge of the boomer generation hit 62 in 2008.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]The first of the “baby boom” generation reach 70 ½ in the year 2016. Every year thereafter everyone over that age must withdraw more money, and more people attain that age.[/FONT]

[FONT=&quot][/FONT]
[FONT=&quot]Consider what happens to the price of the account investments when every year more have to be sold & the funds withdrawn?
[/FONT]

 

[REWahoo]

The "trap" I see with IRA/401k type accounts is the requirement to start withdrawal when you reach age 70 1/2.

In essence the “baby boom” generation began in 1946. The leading edge of the boomer generation hit 62 in 2008.

The first of the “baby boom” generation reach 70 ½ in the year 2016. Every year thereafter everyone over that age must withdraw more money, and more people attain that age.

[FONT=&quot]Consider what happens to the price of the account investments when every year more have to be sold & the funds withdrawn?
[/FONT]

Another urban legend.

Vanguard: Boomer Retiree Wave Won't Crash Market

 

[LOL!]

With all the discussions and threads about how to convert a tIRA to a Roth IRA and pay no income tax on the conversions, I don't see how contributing the max to a tIRA/401(k) is a trap.

Perhaps the trap is being ignorant of the tax laws?

 

[GrayHare]

Anyone who has saved enough to be trapped by retirement accounts is not able to convert to Roth without being taxed on the conversion. All those capital gains are taxed at ordinary rates regardless of whether you pay Uncle Sam now (Roth) or later (RMDs).