Pro-rating Pre / Post Tax IRA withdrawals

[Alan]

I hope to be done filing 8606's within 8 years before I am 70 as I continue to make Roth conversions.

 

[audreyh1]

I don't think we're going to do Roth conversions. Hasn't been any tax advantage so far. The one year we might have, 2010, we used the $8000 tax credit to buy a house and had to keep the 2009 income low to qualify, which wasn't hard that year.

Other than that year, we keep paying AMT which means current high tax bracket 26% for anything marked as ordinary income, and this starts almost at dollar 1 after AMT deductions which are very limited. Our ordinary income is very low, as most of our income is taxed at cap gains rates.

Our IRAs are less than 10% of our investable assets. So we plan to just take the minimum RMDs forever once we each reach 70.5.

Tax torpedo, yes. But not worth paying higher rates now to mitigate, IMO.

 

[Alan]

I don't think we're going to do Roth conversions. Hasn't been any tax advantage so far. The one year we might have, 2010, we used the $8000 tax credit to buy a house and had to keep the 2009 income low to qualify, which wasn't hard that year.

Other than that year, we keep paying AMT which means current high tax bracket 26% for anything marked as ordinary income, and this starts almost at dollar 1 after AMT deductions which are very limited. Our ordinary income is very low, as most of our income is taxed at cap gains rates.

Our IRAs are less than 10% of our investable assets. So we plan to just take the minimum RMDs forever once we each reach 70.5.

Tax torpedo, yes. But not worth paying higher rates now to mitigate, IMO.

Fully understand.

My situation is different in that my marginal tax rate will be 15% higher once RMDs begin so I have plenty of incentive.

 

[travelover]

Well I do have to solve the problem of who will do my taxes when I get too old....

You may have to pay for it to be done. I think that is where I'm heading as DW has zero interest.

 

[audreyh1]

You may have to pay for it to be done. I think that is where I'm heading as DW has zero interest.

I'm sure I will and have no problem paying for professional services when it becomes too much for me. Maybe Fidelity can be relied upon to set me up with the right professionals to help me as I get too old to take care of things.

 

[Sunset]

I have the 8606s from way back in the 90s. It's the dealing with filing this year after year until I die that gets to me. And on to my heirs too! Yech!

I totally agree with you. This makes taxes unnecessarily complex.

Talk about stupid complexity, instead they could have made the rule:
you calculate the pre-tax contributions and move them to a ROTH.

Then all IRA withdrawals are taxable, and all ROTH ones are tax free.

Instead we have to dribble out the amount over decades, thankfully the tax software should carry the heavy burden once we do it the first year.

 

[Gotadimple]

I don't think we're going to do Roth conversions. Hasn't been any tax advantage so far. The one year we might have, 2010, we used the $8000 tax credit to buy a house and had to keep the 2009 income low to qualify, which wasn't hard that year.

Other than that year, we keep paying AMT which means current high tax bracket 26% for anything marked as ordinary income, and this starts almost at dollar 1 after AMT deductions which are very limited. Our ordinary income is very low, as most of our income is taxed at cap gains rates.

Our IRAs are less than 10% of our investable assets. So we plan to just take the minimum RMDs forever once we each reach 70.5.

Tax torpedo, yes. But not worth paying higher rates now to mitigate, IMO.

Two comments:

Who will do this when I'm too old to do it? That would be the person who holds your financial power of attorney, if neither you or your husband are capable. The POA does allow your designate to withdraw funds to cover costs for managing your finances.

I understand the issue with AMT, and that does limit you. As you get closer to claiming Social Security will the AMT problem be reduced? If so, to the extent that you need funds from the portfolio, why not consider taking more than the minimum RMDs, as long as it doesn't put you back into AMT land?

Two wins: get the value of the IRA out and over with sooner and get rid of the annual paperwork early.

Meanwhile, you should consider continuing to do the F8606 just so our Uncle Sam knows the value of your T-IRA, even if there are no tax consequences as you let the balance 'ride with the market.' That's one field to complete with tax software (the value of the account on Dec. 31) - the tax software takes care of the rest. You don't pay taxes if you don't take a distribution.

My thinking did change when I claimed Social Security, but as a single person, I don't need to consider the timing or delay of Social Security on a spouse. Delaying beyond FRA just didn't make sense for me personally.

At the same time, I have been targeting my IRA by drawing funds to support my budget/doing small conversions to a Roth (to the extent I want to bear the tax liability). If I'm at my tax limit (because I want to limit the amount of taxes due), I do look to my brokerage account (esp if there is a capital loss) or my Roth for the additional money to support my budget.

- Rita

 

[audreyh1]

Unless something really horrible happens we won't need the funds from our IRAs to supplement our income, so our thinking is to take only the minimum required by law and not until we have to. And perhaps use part of the RMD to make charitable donations.

Will the AMT go down once we reach SS age? Hard to say. In the modeling I have done for future income it looked unlikely. Maybe in a year with heavy tax loss harvesting.

We don't plan on taking SS until 70 either. SS income will be paying for Medicare, and paying for the taxes incurred by the SS income. There will very little left over for spending. At least it should cover the Medicare part B payments I hope.

Financial power of attorney? Hmm - we don't have children to depend on for that. We'll have to hire some professionals to handle stuff like taxes, but I'm not giving them financial power of attorney. I'll have to figure out how to set things up for us ahead of time and perhaps have a younger sibling involved as an overseer, but I don't expect them to do any of the accounting work.

 

[Rustward]

I have the 8606s from way back in the 90s. It's the dealing with filing this year after year until I die that gets to me. And on to my heirs too! Yech!

Why would you need any Form 8606 that is older than the one most recently filed?

 

[audreyh1]

Why would you need any Form 8606 that is older than the one most recently filed?

That's the last one I filed. The last time I made any contributions and I never made any withdrawals.

If I was supposed to keep filing these every year with no contributions and no withdrawals then I have already screwed up.

 

[Rustward]

That's the last one I filed. The last time I made any contributions and I never made any withdrawals.

If I was supposed to keep filing these every year with no contributions and no withdrawals then I have already screwed up.

You can still file one even if you are not required to. It is pretty simple, and insures that no one will need to go back further than the last return to get the info. Your heirs might appreciate that.

 

[RE2Boys]

I contributed to after tax Traditional IRA back in the 90s also. For several years I was converting to Roth at the top of our 15% tax bracket until all my wife's have been converted, no more 8606s for her.
Then started whittling away at mine but Mr. Market grew the T-IRA faster than I could convert to Roth. Got the basis down from $16K to less than $8K but with the bull market of last 5 years, I've resigned myself to have lost the battle.
I really never gave much thought regarding prep of the 8606, the software does all the heavy lifting, just need to remember that it need to be there. Most concerned once I'm gone, my wife would not know what to do.

 

[sengsational]

I think that is where I'm heading as DW has zero interest.

Well, that should make it easier to file...she wouldn't be waiting for any 1099-INT forms

 

[audreyh1]

You can still file one even if you are not required to. It is pretty simple, and insures that no one will need to go back further than the last return to get the info. Your heirs might appreciate that.

I see. Well, hmmmm.

 

[sengsational]

If you're not required to file (i.e. you made no withdrawals), there will only be one number on the 8606...your basis in traditional IRAs for the tax year and all prior years.

The instructions do say you should not actually file the form unless it's going to be doing something, but nothing stopping you from printing it out for your own records.