Your journey to 100% non-taxable?

[SecondCor521]

How does one disinherit lump sum from an IRA ??

I am curious to know

If you are the primary beneficiary, you can disinherit any portion of the money and the rest will flow to the contingent beneficiaries. By disinheriting, you cannot specify who gets the money. The contingent beneficiaries will split the amount according to their percentages as specified. You only need to write to the brokerage firm that holds the money.

The legal term is "disclaim" (or possibly "renounce").

There are a number of requirements:

1. The disclaimer must be unqualified and irrevocable.
2. The disclaimer must be in writing.
3. The disclaimer must be executed within 9 months of death.
4. You can't have already accepted the asset.
5. Perhaps this is a requirement of my state law, but the applicable probate court must be notified as well.
6. There may be others.

You can read about federal disclaimer law at 26 USC 2518: 26 U.S. Code § 2518 - Disclaimers

The disclaimed asset then passes as though you had predeceased the original owner - either via beneficiary designations, the will, or state intestacy law.

 

[SecondCor521]

As for the OP, it's possible to convert too aggressively. As others have pointed out, leaving enough in the tax-deferred accounts to fill the standard deduction or itemized (medical) deduction would effectively be taxed at 0%, and tax-deferred money left to charity would also be taxed at 0%.

If RMDs start at about 4%, then for a single person over 65 the standard deduction of about $15K would mean having an IRA balance of $375K. For MFJ, it would be approximately twice that, or $750K.

If someone has other income streams such as a pension, then maybe the analysis is different. And I'm not thinking about how SS and SS taxability plays into all of this but it would likely be a consideration.

 

[NgineER]

If there's any chance you get lucky enough to retire earlier than 59.5 (or 55, IF your company allows that rule, many don't)...I have seen far too many folks come here with sizeable eggs ready to support a healthy retirement, asking "Um I'm 52 I have $4m, how can I get my money without heavy taxes and penalties and retire today?" (spoiler, they can't).

They can and it is likely better from a taxation perspective with a long time horizon to start drawing down these accounts at 52 vs. at 59.5.

The pre-55/pre-59.5 can be handled with a 72t. Or principal withdrawals from the Roth. There’s always a way to get to that money.

Agreed, but it requires planning, which I'd say people on this board know how to do.

But I am also a proponent of balancing your assets better to not be completely in one bucket as it likely is not the best approach, although using business losses to convert from traditional to Roth IRA tax free is a great option if you have it.

For our situation Mrs. NgineER had contributed to a 401k before we met and while in grad school converted this to a Roth IRA at very low taxes. The last year of my wife's job before staying home with the kids we contributed the max to a Roth 401k instead of the traditional. After her "ER" to be a SAHM (which is far from ER) we did some Roth IRA conversions to the tune of $50k in total over five years. I have for about a decade been contributing the maximum to the after-tax 401k portion at my work (9% of salary) which is rolled over to a Roth IRA every month. Finally, we've been mainly contributing to Roth IRAs rather than traditional IRAs.

This has led us to have over $1M in Roths, about $100k less in the traditional accounts and finally a measly $300k in ESPP and brokerage accounts. This is something we do want to boost, but buying cabins or rental properties keep setting us back. The power of compounding means that we will never be able to catch up in the traditional account before ER in a little over five years.

 

[kgtest]

What you plan seems unnecessary to me. The tax code allows for several ways to pay ZERO tax on otherwise taxable assets.
First you’ve got the standard deduction to exceed.
Then qualified dividends and LTCG pay 0 tax up to their level.
I’ve been retired for 6yrs, starting at age 52. Having a significant amount in taxable accounts allows for the early retirement without stealing from your deferred and tax free buckets early. You really want to hold that Roth as long as possible or practical.
I can understand limiting 401k contributions, but don’t shun taxable assets. They give you the most options.

I can withdraw my contributions tax free. I've contributed 100s of thousands to my Roth IRA at this point. DW has as well. We did this through mega back door conversions and some contributions up to this point during some years with significant business losses passing through.

We will need at least 8 years or so of cash to live on. Our plan was to take some from our Broker, and the rest from Roth.

 

[kgtest]

I refuse to pay over 24% Federal tax for my Roth conversion.

Me as well. That's why I am starting these conversions in my 40s.

 

[OldShooter]

100% tax free is not possible for me. Well, yes it is, but to achieve that goal would mean paying higher taxes on the way to it, and netting less income after achieving it. Not so good.

Eliminating taxes is a silly goal. The goal should be maximum dollars in pocket. Taxes paid along the way are irrelevant.

 

[Koolau]

Me as well. That's why I am starting these conversions in my 40s.

I wish I could have done that! I'd be a lot better off now, but that's water under the bridge.

For the young'uns here, a word to the wise - if you are eligible. Balance your taxable, Roth and tax-deferred to your current and future reality. (Yes, I know. The future is unknown.)

 

[old medic]

Eliminating taxes is a silly goal. The goal should be maximum dollars in pocket. Taxes paid along the way are irrelevant.

But the less $ you pay in tax, the more $ stays in the pocket. Pay 12% now on $25K and watch it grow, or watch it grow and then pay 12% on $100K later
QCDs have always confused me.... I don't want to pay X amount in tax, so I'll just give it all away...


We were late getting into the saving game outside our pensions. Only 10% of our nest egg is in Roth since we have needed the tax breaks for ACA. So for us, our journey will start next year, and still trying to figure out a plan, But wanting everything in nontaxable before she starts SS. She'll start her pension at 58, so we will have a few years to do conversions.

 

[OldShooter]

But the less $ you pay in tax, the more $ stays in the pocket. Pay 12% now on $25K and watch it grow, or watch it grow and then pay 12% on $100K later
QCDs have always confused me.... I don't want to pay X amount in tax, so I'll just give it all away...

Not always. For example, there are lots of people who delight in stiffing Uncle Sam by buying muni bonds, but the lower interest rate the munis pay puts less in their pockets than they would have by buying taxable bonds and paying the taxes.

Re QCDs, they are worth figuring out. By giving around $30K in charitables every year we get that number off our itemized deductions, which sans the QCDs are about half of the standard deduction. So we take the standard deduction and get the difference as a "free"tax reduction.

 

[jebmke]

Not always. For example, there are lots of people who delight in stiffing Uncle Sam by buying muni bonds, but the lower interest rate the munis pay puts less in their pockets than they would have by buying taxable bonds and paying the taxes.

Re QCDs, they are worth figuring out. By giving around $30K in charitables every year we get that number off our itemized deductions, which sans the QCDs are about half of the standard deduction. So we take the standard deduction and get the difference as a "free"tax reduction.

right; QCDs don't by themselves generate more money for you. If one is going to donate to charity, QCDs often have benefits vs. making a donation and reporting it on Schedule A.

The easiest way to "pay less tax" is to "make less money." From there, it gets ever so slightly more complicated.

 

[gianmatt]

If you have significant medical expenses later in life, and you withdraw from a taxable IRA, that can be a nice itemized deduction against your other taxable income (like SS.) If all your money is in a Roth, that's not an option. The idea that having 100% Roth IRA is desirable is not always true.

 

[skyking1]

As soon as we quit working, we'll Roth convert to the top of the bracket and probably get about half of my spouse's 403bs 401ks converted before social security.

 

[gianmatt]

But the less $ you pay in tax, the more $ stays in the pocket. Pay 12% now on $25K and watch it grow, or watch it grow and then pay 12% on $100K later

You still end up with the same amount whether you pay the 12% now or later. Let's say your investments can double.

1. Don't convert. $25K doubles to $50K. You pay 12%, you're left with $44K.

2. Convert. You pay 12% on $25K, reducing it to $22K. $22K doubles to $44K.

 

[RetiredHappy]

You still end up with the same amount whether you pay the 12% now or later. Let's say your investments can double.

1. Don't convert. $25K doubles to $50K. You pay 12%, you're left with $44K.

2. Convert. You pay 12% on $25K, reducing it to $22K. $22K doubles to $44K.

Math is hard.

 

[Surewhitey]

You still end up with the same amount whether you pay the 12% now or later. Let's say your investments can double.

1. Don't convert. $25K doubles to $50K. You pay 12%, you're left with $44K.

2. Convert. You pay 12% on $25K, reducing it to $22K. $22K doubles to $44K.

What happens when you double again?

 

[old medic]

What happens when you double again?

Or a spouse dies and your now in a higher tax bracket, as would be our case with RMDs
Same $25K at 12%, now, $22K would grow to almost $56K in the 16 years till DW RMD. $25K would grow to $63.500 and would be the same after tax at 12% But only $49500 If one is gone.
And consider that in a Roth it continues to grow... grand kids get $101K if she makes 80... How much of the original $25K would be left after RMDs? About $75K and would owe tax on that....
Math is hard when you dont have the known figures....

 

[Koolau]

But the less $ you pay in tax, the more $ stays in the pocket. Pay 12% now on $25K and watch it grow, or watch it grow and then pay 12% on $100K later
QCDs have always confused me.... I don't want to pay X amount in tax, so I'll just give it all away...


We were late getting into the saving game outside our pensions. Only 10% of our nest egg is in Roth since we have needed the tax breaks for ACA. So for us, our journey will start next year, and still trying to figure out a plan, But wanting everything in nontaxable before she starts SS. She'll start her pension at 58, so we will have a few years to do conversions.

We tried to convert most to Roths, but didn't get it all done before SS/Pension/RMDs. I guess we'll take the (First World Problem) tax hit and just be glad we have that problem instead of scrapping for our next meal.

I'd LOVE to be tax free! EVEN if it weren't the best move financially in the long run. I guess it's an individual thing.

 

[skyking1]

QCD's are quite handy for folks like us without kids. We can leave some to our sibling's children, but we always wanted to support certain orgs and the QCD is tailor made for that. My wife can QCD her RMD's if we are otherwise flush at that time.

 

[hotwired]

What you plan seems unnecessary to me. The tax code allows for several ways to pay ZERO tax on otherwise taxable assets.
First you’ve got the standard deduction to exceed.
Then qualified dividends and LTCG pay 0 tax up to their level.
I’ve been retired for 6yrs, starting at age 52. Having a significant amount in taxable accounts allows for the early retirement without stealing from your deferred and tax free buckets early. You really want to hold that Roth as long as possible or practical.
I can understand limiting 401k contributions, but don’t shun taxable assets. They give you the most options.

"Optionality" is apparently the word that the cool kids use for "something that gives you the most options". I love that word. . .

 

[Koolau]

"Optionality" is apparently the word that the cool kids use for "something that gives you the most options". I love that word. . .

Heh, heh, I guess I'm getting old. That's the first time I'm hearing that word. Thanks for sharing - not that I'll ever be cool again.

 

[VanWinkle]

It is a thing more often than not. I am included in the don't spend Roth funds group. I need to take some of it off the table also, but hesitate every time.

 

[Alex The Great]

In fact, I'm 100% tax free right now. I do not pay any federal tax. I do have some money in taxable account, but taxable income is well below the number where tax is due. I know tax bill will hit me some time in future, but I may not live that long. Given that RMD age increases almost every year.