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Old 02-19-2016, 04:35 PM
 
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The lump sum may be taxed higher then taking the money each year even with rmd's

You may also trigger the medicare surcharges too
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Old 02-19-2016, 04:36 PM
 
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luv4horses, if you take a pile of money out of your 401(k) 403(b), or traditional IRA that money will be taxable and depending upon how much your Pile" is, you might throw yourself into a higher tax bracket anyway. Even converting the money from Traditional to ROTH causes the same tax quandary. What I have been doing is taking money out of my husband's Traditional IRA in an amount that will not cause us to change brackets since he was 59 1/2. I counterbalance this by putting money into my Traditiional IRA. Since I am 6 years younger than him, that gives me 6 extra years before I have to take the RMD. I also plan to purchase a QLAC which will allow me to defer the tax consequences to age 85. But eventually I will have to pay the piper and the QLAC has limits of $125,000 or 25% -- whichever is less - of the tax deferred account.

My hope is that the longer I can defer the tax consequences the lower they will be as tax rate base amounts change annually and so do the personal exemptions and standard deduction amounts.
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Old 02-19-2016, 04:40 PM
 
Location: Hayden
446 posts, read 553,528 times
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I start getting SS in May. It makes my income go up by 30% but my taxes go up by 90%!!!!!!

Every silver lining has a cloud.
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Old 02-19-2016, 05:40 PM
 
Location: OH>IL>CO>CT
5,237 posts, read 8,406,103 times
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Quote:
Originally Posted by luv4horses View Post
And in the category of another dumb question...is there any strategy to diminish this problem just before you take SS or need RMDs? For example, the year you are 69 could you take a pile of money out of your IRA to hold you over for the 'extra' you would need for the next few years?
Quote:
Originally Posted by LookingatFL View Post
luv4horses, if you take a pile of money out of your 401(k) 403(b), or traditional IRA that money will be taxable and depending upon how much your Pile" is, you might throw yourself into a higher tax bracket anyway. Even converting the money from Traditional to ROTH causes the same tax quandary. What I have been doing is taking money out of my husband's Traditional IRA in an amount that will not cause us to change brackets since he was 59 1/2. I counterbalance this by putting money into my Traditiional IRA. Since I am 6 years younger than him, that gives me 6 extra years before I have to take the RMD. I also plan to purchase a QLAC which will allow me to defer the tax consequences to age 85. But eventually I will have to pay the piper and the QLAC has limits of $125,000 or 25% -- whichever is less - of the tax deferred account.

My hope is that the longer I can defer the tax consequences the lower they will be as tax rate base amounts change annually and so do the personal exemptions and standard deduction amounts.
From various sources I have read over the last 10 years on this subject (aka the "Tax Torpedo"), what luv4horses is doing (and what I did prior to age 70.5), seems to be the most common way* to minimize the effect of the "torpedo".

Another thing I was able to do was convert a small employer pension from monthly payout to lump sum. The lump was then rolled over to an IRA. The net effect was that the subsequent small increase in the annual RMD amount was less than the yearly pension payout, thereby decreasing the hit on SS benefits.

*also known as "Topping Up the Bracket"

As always, YMMV.......
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Old 02-19-2016, 06:04 PM
 
Location: Wisconsin
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After calculating tax ramifications, I've been doing annual Roth conversions - and, so far, haven't encountered any shocking tax issues. Goal is to get as much as possible away from the RMD requirements - and, if needed, have a stash of nontaxable cash at my disposal, without triggering a tax nightmare.

It's easier for me because I have Schedule E writeoffs to offset the conversion, plus no pension to speak of. Those with decent pensions and tax-deferred IRAs have a tougher road tax-wise. Frankly, I'd prefer the pension and attendant tax issues.
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Old 02-19-2016, 06:16 PM
 
Location: Albuquerque NM
1,660 posts, read 1,525,919 times
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Quote:
Originally Posted by Ariadne22 View Post
It's easier for me because I have Schedule E writeoffs to offset the conversion, plus no pension to speak of. Those with decent pensions and tax-deferred IRAs have tougher road tax-wise. Frankly, I'd prefer the pension and related tax issues.
That is what I've decided about my pension and IRA. I've debated Roth conversions but at the 28% tax bracket I'm not sure that it is wise. My tax-deferred IRA is not so large that RMDs will be that substantial and I'm not interested in leaving an inheritance - plan to spend down most of it anyway.
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Old 02-20-2016, 04:06 AM
 
Location: Mount Airy, Maryland
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Quote:
Originally Posted by mathjak107 View Post
not really . In this case you would have rmd's and a bigger ss check perhaps making it even more painful . each case will be different . what we will spend down delaying ss won't make a dent in our rmd's
This is kind of my line of thinking. From the article linked below:


For example, if a retiree is entitled to $2,000 in Social Security benefits at the full retirement age of 66, he or she will collect just $1,500 per month if he or she claims early at 62. But if the retiree waits until 70, when delayed retirement credits boost benefits by 8% for every year beyond full retirement age, the individual will collect $2,640 per month.

That amounts to $31,680 per year — money that one wouldn't need to withdraw from a retirement account to support the same level of spending and possibly avoid being hit by the tax torpedo.

Avoiding a retirement 'tax torpedo'
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Old 02-20-2016, 04:20 AM
 
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the problem is lower income folks can usually only delay ss by working until they file . those with enough assets to safely spend down while delaying ss and not working will usually find their ss is taxed no matter what once rmd's start because they will have to have a sizable amount saved to lay out that kind of dough and not run low on savings by spending down to much of it delaying ss .. .

our generation did not have roths for decades of our working careers so pretty much most of us with sizable savings will have taxable income from our retirement money that will end up getting our ss taxed . it all will depend on how much you have socked away and how much is in cash that already had taxes paid or roths .

you can top off your bracket each year if you have room and do some roth conversions if you are in the 15% range . but if you retire pre 65 and need health insurance until medicare those conversions may cost you your subsidy

Last edited by mathjak107; 02-20-2016 at 04:31 AM..
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Old 02-20-2016, 05:40 AM
 
Location: RVA
2,167 posts, read 1,266,787 times
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Exactly, except that if you have enough taxable savings to comfortably draw against in order to delay SS (which replaces income 100% taxed with income 85% taxed), you are not likely avoiding the Torpedo, but simply trying to cover your bases and reduce the tax burden, which is more unpredictable the farther away you are.

If you are married during your contribution years, you should consider what happens tax wise if either of you become widowed, as then the tax burden for the same income rises dramatically. Typical tax planning assumes no change in tax rates,but shifts to a higher trigger levels, which is RECENTLY historically true, but tax rates may have to rise i stead of trigger levels if the US wants to actually reduce the 3trillion in debt the QE and ACA have added to. If you have been a regular and healthy saver with a good income most your life, the assumption for contributing tax deferred that in retirement "you will be in a lower tax bracket" is shockingly untrue. At the least, you may be in the same or in a higher bracket if you "oversaved" thanks to RMDs. As I keep rising in my tax bracket, and approach the next, I realize that maxing my Roth, and rollovers in to it, now, may actually save me taxes later, but it is a hard pill to swallow, after taking reductions to AGI for IRAs and 401ks for so many years. You just get used to paying a certain amount in taxes each year, so suddenly paying $3k more than planned seems like a lot to cough up in order to possibly cover yourself for paying what may be only marginally more later, or even the same.

I realize that when prudent tax planning is your major concern, vs enough to live on, that its a very nice problem to have. Everyone's definition of rich is skewed by what they have earned and lived their whole life. To someone that retired earning $50k a year, then $100k sounds rich. But for those at $100k, $50k sounds depressing, and $200k about right. And so it goes on up. But when you hit say $100k and your total tax burden is $35k a year, vs maybe a $12k for a $50k individual, the net differential drops from an imagined $50k to only a real net of $27k, so the harder you work to make more, the less you get in real return. As your taxes keep increasing more per dollar earned, it gets frustrating.

The key, of course, is to live as if you made $50k while earning $100k, which can be just as hard a pill to swallow, to delay your just reward for a future that may never happen,
so that your spouse or heirs get to enjoy what you worked for. Only you yourself can define what is comfortable enough. And live at that level regardless of income above that requirement. Comfort creep is crazy easy to fall victim to. "Lived for most of my life without a cell phone, now don't Know how I'd function without a smart phone"! Could if I Had to, I'm sure, but really don't want to.

Many are comfortable at $50k, and perfectly happy there. Others require $100k or more, depending on where you live, and what you have planned, and what kind of safety net you feel you need. No one absolutely HAS to have $100k to be happy, obviously, but it can easily make you a very real unhappy to be living a non extravagant lifestyle your whole life, and then suddenly faced with having to drop your standard of living in half, because you underestimated the cost of living like you were, in retirement.

Last edited by Perryinva; 02-20-2016 at 06:14 AM..
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Old 02-20-2016, 06:46 AM
 
Location: Mount Airy, Maryland
10,463 posts, read 5,930,681 times
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To be clear the money that the IRS and SS considers income would be tradition IRA rollovers from a 401(k). Withdraws from roths, other brokerage savings accounts etc would not be considered income other than the capital gains on the savings correct?
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