IRA withdrawal tax strategy

[Ticker]

I am not an accountant, but I think this might be a 2015/16 consideration. any help would be appreciated.
I ERed in Oct of 2014. I will have no earned income in 2015 and 2016. My wife's pension and SS will come to about $15k this year. with the standard deduction and exemptions ($20,300 in 2014), could I withdraw $5k from my IRA in with no tax implications?

($15k income + $5k withdrawals = $20k, amount less than standard deduction and exemptions, and thus tax free?)

How does the exemption of SS income work? Can I withdraw an additional amount equal to her SS income without paying taxes, since income will be low?

Thanks in advance!

 

[kaneohe]

Try inputting your info here https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

feels like there's more room there in the 0 tax range

 

[Ticker]

Thanks for the link, K-you're correct about the headroom
looks like a $12,050 withdrawal will keep me tax free in both years.

Thanks again!

 

[gerntz]

Not sure why you want to be tax-free now. IRA RMD's + full SS benefits will ultimately create more yearly income for you that you can't avoid. When that happens, my guess is you'll be forced into paying income tax. And if so, the bracket rate then could be so high - I don't know - that having enough income now to be paying the 15% rate - by taking more IRA withdrawal now & putting it in non-taxed ever Roth IRA - & thus have lower IRA RMD income down the road has a good chance of creating net lower taxes for you long-term. Net, I'd look into that scenario before assuring zero tax now.

 

[mathjak107]

age matters too , while the rmd's look like a lot you have to remember that each year tax brackets allow more and more income through at lower rates. by the time i am ready for rmd's 125k may be the 15% bracket.

 

[user5027]

Hopefully your portfolio returns, by the time you are ready for rmd's, keep the same pace.

I ignore what future brackets may look like. Another big unknown is the will of congress to change tax law.

 

[Ticker]

Not sure why you want to be tax-free now. IRA RMD's + full SS benefits will ultimately create more yearly income for you that you can't avoid. When that happens, my guess is you'll be forced into paying income tax. And if so, the bracket rate then could be so high - I don't know - that having enough income now to be paying the 15% rate - by taking more IRA withdrawal now & putting it in non-taxed ever Roth IRA - & thus have lower IRA RMD income down the road has a good chance of creating net lower taxes for you long-term. Net, I'd look into that scenario before assuring zero tax now.

Thanks, Gerntz- I will start collecting SS in 2 years. My plan is to take money out of my IRA and put it into my roth. Basically, a conversion of $12k/year (my current non-tax headroom) without paying any taxes. Your strategy of taking a bigger withdrawal now and paying taxes on the money today to reduce rmd taxes later is one I haven't considered, but will. I appreciate the tip!

 

[pb4uski]

That strategy particularly makes sense if after SS, RMDs and any pensions kick in you will be in a higher tax bracket (usually 25%).

I currently do annual Roth conversions to the top of the 15% tax bracket but because part of the conversion is sheltered from tax by deductions and exemptions and part is taxed at 10% and some at 15%, my effective rate on the conversion is only abut 6%.... which is probably a good 20% lower than the tax I avoided when I deferred the income, so I'm making out like a bandit.

Beware though, if you have preferrential income like qualified dividends and long term capital gains, if you overshoot the top of the 15% tax bracket then the incremental tax on the excess can be 30% but if you do overshoot it is easy to do a recharacterization to bring your taxable income back down to the top of the 15% bracket.

 

[RothReady2Retire]

Try inputting your info here https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

feels like there's more room there in the 0 tax range

Great tool! Thank you!

 

[Corporate ORphan]

Don't want to hijack this thread but it brings up a point we are considering now. We are currently in the 15% tax bracket. We are looking to get a ACA subsidy if BCBS doesn't renew our non-ACA compliant policy so we were thinking of converting some of our IRA into a Roth this year. We were thinking of using the conversion to reduce RMDs in the future. Anyone have a way to determine how much makes it worthwhile if it pushes you to the 25% or greater tax bracket? We are both 59.

 

[user5027]

Don't want to hijack this thread but it brings up a point we are considering now. We are currently in the 15% tax bracket. We are looking to get a ACA subsidy if BCBS doesn't renew our non-ACA compliant policy so we were thinking of converting some of our IRA into a Roth this year. We were thinking of using the conversion to reduce RMDs in the future. Anyone have a way to determine how much makes it worthwhile if it pushes you to the 25% or greater tax bracket? We are both 59.

Go over to Bogleheads and read...
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

 

[gerntz]

Thanks, Gerntz- I will start collecting SS in 2 years. My plan is to take money out of my IRA and put it into my roth. Basically, a conversion of $12k/year (my current non-tax headroom) without paying any taxes. Your strategy of taking a bigger withdrawal now and paying taxes on the money today to reduce rmd taxes later is one I haven't considered, but will. I appreciate the tip!

Happy to possibly help though I can't take credit for the strategy - learned it from others here.

 

[sengsational]

Go over to Bogleheads and read...
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

I tried to use that sheet one time, but even though I'm well versed in spreadsheets and retirement models, I was never able to get a decent comfort level with that model. I just checked the newest version, and it's improved, but still baffled me. Admittedly, I didn't spend "enough" time with it. I had an idea that I posted over in bogleheads...to offer a cookbook that described how to enter an existing workable i-orp model into the RPM spreadsheet. I hope that idea takes flight!

 

[user5027]

I tried to use that sheet one time, but even though I'm well versed in spreadsheets and retirement models, I was never able to get a decent comfort level with that model. I just checked the newest version, and it's improved, but still baffled me. Admittedly, I didn't spend "enough" time with it. I had an idea that I posted over in bogleheads...to offer a cookbook that described how to enter an existing workable i-orp model into the RPM spreadsheet. I hope that idea takes flight!

The first time I saw the RPM spreadsheet I was confused by the complexity and made a mental note to return to it when I had time to work through it.

I did eventually and spent several hours one day. It showed how ss and rmd's will have us in the 25% and eventually the 28% bracket. It also showed the benefit of doing roth conversions. I am convinced and am prepared to start this year.

 

[hnzw_rui]

Go over to Bogleheads and read...
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

I tried it and I couldn't figure out how to make it play nice with my set of parameters:
single, retire at age 55, no SS

 

[pb4uski]

I put my data in it and with a little finagling for differences between the models, the results with and without Roth conversions to the top of the 15% tax bracket were pretty close to my DIY model. At age 100, with Roth conversions was 106% of my DIY model and without Roth conversions was 112% of my DIY model using the same assumptions wherever possible. The aggregate amount of Roth conversions from 2015 until I am 70 was within 10% between the two models.

The refinements that I have in my model that I had to finagle for in this model was my model bifurcates equity returns on taxable accounts between qualified dividends and unrealized appreciation and also includes an estimate of each year's capital gains for sales from my taxable portfolio to provide for our living expenses so I had to goose up the % of return that was tax free to cover those capital gains as well as qualified dividends.

But overall the fact that the age 100 accumulated values were so similar with and without Roth conversions gives me more confidence in my model.

It is quite complicated though, and i'll spend some more time with it sometime along.

For us, Roth conversions are a very big deal. Our NW (ex real estate) is 25% higher at age 80 and 45% higher at age 100 with Roth conversions.

 

[Ticker]

That strategy particularly makes sense if after SS, RMDs and any pensions kick in you will be in a higher tax bracket (usually 25%).

I currently do annual Roth conversions to the top of the 15% tax bracket but because part of the conversion is sheltered from tax by deductions and exemptions and part is taxed at 10% and some at 15%, my effective rate on the conversion is only abut 6%.... which is probably a good 20% lower than the tax I avoided when I deferred the income, so I'm making out like a bandit.

Thanks for the tip, pb. I am now thinking about delaying SS for a couple of months to incorporate you and Gerntz's strategies. That would give me 2 full tax years to convert from the IRA to the Roth at preferred tax rates. I found the "sweet spot" at 6%, it should work out nicely for me. Even exceeding that level would be advantageous as I don't think that I can predict inflationary changes in the value of the dollar. I can see a scenario where my requirements, due to inflation, would put me unexpectedly into a higher tax bracket down the road.

 

[imoldernu]

We have been doing this for many years, and have not had to pay Federal or State taxes. Didn't know about the worksheet strategy, but each year, use TaxAct to approximate next years tax free withdrawals.
Left some $$$ on the table early on, for two years, but not since the early 1990's.
Being relatively poor helps...

 

[RetireAge50]

We are going to plan about the same TAXABLE income each year (until we die). Of course this is based on many factors like ROI, life expectancy, etc but we will calculate what we expect and then make adjustments (as needed).

So a combination of Roth converting, Roth withdrawing, tax deferred, taxable funds keeping taxable income about the same.

I'm just gonna assume all social security will be taxable and I am paying for my own health insurance.

 

[sengsational]

For me, I need a model that tells me to pay some tax now. Otherwise, I'll get slammed later. But the whole thing up until this point has been to delay paying taxes. Old habits are hard to break.

The author of the model responded back to my inquiry about having his model match my somewhat trusted results from i-orp. There is a field-by-field mapping on the bottom of the results page. So if you are an i-orp devotee and have a model there that you trust, you should be able to get those inputs to generate a similar output in RPM and then you'll have the ability to tweak it from there.

 

[Trawler]

If you have a High Deductible Health Insurance Policy that is HSA compatible you can contribute up to $6,650 for a family plus if over 55 add $1,000 into a Health Savings account and this becomes a non itemized deduction on front page of 1040 tax return. This give you the more funds to convert from IRA to Roth.

 

[gerntz]

IRA RMD's + full SS benefits will ultimately create more yearly income for you that you can't avoid.

I forgot about (at least) one thing here: you can avoid some RMD income & thus taxes by gifting to charities directly from the IRA once you reach age 70.5. Tax law was recently permanently changed to make these gifts part of your RMD & not count as income. That's a better deal than taking the RMD income & then gifting. Net, as you approach age 70.5, may want to delay gifts till you reach 70.5 & then gift more.

 

[woodguy00]

Ticker,

You mention delaying social security a few months next year and I see from another post that suggests you plan on taking SS at age 62. Have you investigated alternate claiming strategies ? Perhaps you would be better using your IRA's early and delaying SS. Most analysis leans in that direction particularly if you have been the higher earning spouse. Food for thought.

 

[Hermit]

I forgot about (at least) one thing here: you can avoid some RMD income & thus taxes by gifting to charities directly from the IRA once you reach age 70.5. Tax law was recently permanently changed to make these gifts part of your RMD & not count as income. That's a better deal than taking the RMD income & then gifting. Net, as you approach age 70.5, may want to delay gifts till you reach 70.5 & then gift more.

I'm 65 and have committed a large sum to my favorite charity. The cash is sitting in a bank, but I don't count it as mine. When I reach 70.5, I will start moving it over to the charity, unless they need it prior to that. I'm in the 25% bracket and will never be lower. I'll be in the 28% bracket when RMDs kick in, but I don't think I can do much about that beyond the charitable gifts. Nice to know they finally made the charitable withdrawal for RMDs permanent.

 

[pb4uski]

I forgot about (at least) one thing here: you can avoid some RMD income & thus taxes by gifting to charities directly from the IRA once you reach age 70.5. Tax law was recently permanently changed to make these gifts part of your RMD & not count as income. That's a better deal than taking the RMD income & then gifting. Net, as you approach age 70.5, may want to delay gifts till you reach 70.5 & then gift more.

Especially if you don't otherwise have itemized deductions that are at least equal to the standard deduction before the gift or are in itemized deduction phase-out land, etc.

I'm 65 and have committed a large sum to my favorite charity. The cash is sitting in a bank, but I don't count it as mine. When I reach 70.5, I will start moving it over to the charity, unless they need it prior to that. I'm in the 25% bracket and will never be lower. I'll be in the 28% bracket when RMDs kick in, but I don't think I can do much about that beyond the charitable gifts. Nice to know they finally made the charitable withdrawal for RMDs permanent.

Sounds like you might be better off to keep the cash since you have already paid tax on that money and gift the same amount from your IRA to the charity.