Tax efficiant planning (moving, social security, inheritance, states)

[mathjak107]

giving some thought to the ideas of ed slott im trying to decide how best to hold the various investments in my retirement portfolio.

some are in my 401k at work, some are in my taxable account , some are in tradional iras and starting next year some will be converted to roth accounts.

where you hold the various assets can have a pronounced effect on how much you get to keep from the tax man.

old school thinking was keep the income producing assets in your tax deferred accounts and your equities in your taxable account.

afterall why pay regular income tax on equities in an ira when you can pay 1/2 that in your taxable account.

i find its alot more complex then that and im still tossing it around in my head.



im curious if anyone has given thought to this aspect of planning ????????????????

im finding it confusing because im realizing where to keep what all depends on whether your goal is pass on your wealth or live off it as well as whether the equities in your taxable account spin off lots of dividends


if i was planning on not selling my funds in my taxable account and passing them on eventually then low dividend paying index funds would be my first choice for equities .... never paying any taxes on the gains and the kids getting them tax free is the best deal around.

if the funds spin off regular taxable dividends then you have to analyze these numbers as there will be taxes paid all along and the inheritance factor is eroded slightly.

roth and roth conversions would be the next best place.... the biggest gainers namely the equities should be here . my equities buckets have 15 year time frames so they still have lots of growing time.

being i will need withdrawls to live on , and the gains are low, and the time frame much shorter im not so sure converting my bonds to a roth is worth doing at this point (age 57)

i think ill just leave the bond funds in my taxable account and 401k as just that , pay the taxes as i spend it down and leave the equities in both the taxable accounts and the roths to do their growing for many years if not forever.


ill spend the regular ira bond fund money and 401k bond fund money first dwindling down the mandatory withdrawls on the bond funds early on and if tax rates rise off in the future i would already have spent down a big part of that thru the years and payed the taxes all along while tax rates were on sale..


this is making my hair hurt!

[jrkliny]

....."this is making my hair hurt!"I agree. Personally, when I retire and beforehand, I want to spend my time enjoying life and not worrying about finances, financial planning, asset management, and especially taxes. I did some quick calculations and realized that I would likely improve my finances more by working a few more weeks or months than I could ever achieve with more of my time spent on detailed planning. That consideration helps me put financial planning and financial anxieties into a more understandable perspective.

[mathjak107]

it would be great to not have to deal with any of this stuff and quite frankley the government hopes we dont...

they have a plan in place , their plan is they are our partner in everything we own and we dont even know to the tune of how much a partner they will be ...

we have a choice , the government plan or our own plan on our own terms and time table.

i prefer to use my own plan instead of the default governments plan ......

[cdelena]

I have no pat answers and am currently in a position with investments and taxes that takes some attention on a regular basis.

My current plan (revised after a big drop in portfolio/RE value) has me spending my resources at a rate as conservative as possible until SS at age 70. Changes by government or health (now our biggest expense outside of housing) could force the plan anytime.

My biggest tax liability is not the earnings in taxable accounts but withdrawals from tax deferred accounts. I do a simulation every year to see how much to withdraw (staying within a range that will not deplete the portfolio too soon) while keeping the tax due in a tolerable range. This drives our annual budget (which is way smaller that once anticipated).

I am irked on occasion as the government continues to take people off the tax roles and adds benefits to designated groups while I am still squeezing to have enough to live, unable to find employment, and still pay taxes every quarter.

[akck]

Other than having an idea of what I might do, it's really not worth it to make a detailed plan for taxes. Too many things can change between now and well after you retire that can negate any tax planning you might do. For instance, they can raise the capital gains rate, institute a national sales tax, tax inherited Roth's, etc., or they may do nothing.

Since most of my investments are in a traditional IRA, I'm waiting until 59-1/2 before doing anything to eliminate any penalties. If it makes sense to convert to a Roth at that time (assuming you can), then I'll do so.

[mathjak107]

IM 57 but ill convert to roths next year... even when things change the old structures are almost always grandfathered in......

id rather convert now as i know where our tax rates stand now , id want to do it before the accounts grow any larger and with over 90 % of congress saying they will convert to roths next year thats says alot for what may be up coming and for the fact that roths will probley be sacred forever.

buying out uncle sam is like paying off a mortgage on your house...

[mathjak107]

Originally Posted by akck

Other than having an idea of what I might do, it's really not worth it to make a detailed plan for taxes. Too many things can change between now and well after you retire that can negate any tax planning you might do. For instance, they can raise the capital gains rate, institute a national sales tax, tax inherited Roth's, etc., or they may do nothing.

Since most of my investments are in a traditional IRA, I'm waiting until 59-1/2 before doing anything to eliminate any penalties. If it makes sense to convert to a Roth at that time (assuming you can), then I'll do so.

there are no penaltys for converting to a roth before 59-1/2.

heres why you may not want to wait....


next year not only are they removing the current income restriction which keeps anyone above 160,000 a year in income from being allowed to convert but heres the best part:

you can convert next year in 2010 and pay no taxes on it until 2011 and 2012 .

they are letting you declare 1/2 in 2011 and 1/2 in 2012 and nothing next year. ever see the irs let you do that one?

thats an amazing deal, as for me it cuts my tax bracket drastically by only declaring 1/2 each year, in fact by 2011 ill be retired with no pay check to boot so this conversion will cost very little in comparison to now..

the other important point is its of my opinion that it may only be worth converting if you can pay the taxes with money outside the ira...


if you try to pay the taxes with ira money not only will you be hit with a penalty but the more you convert the more taxes you owe the more you have to convert to pay the taxes ann round and round we go.


the biggest advantage of having all that ira money grow tax free will be diminished if only 1/2 or so is left after taxes...

the other nice thing also if your in that situation is the tax money outside the ira that is used to pay the taxes reduces the size of a taxable estate by that amount and is basically traded for tax free money in the roth..


buying out uncle sam is important. you want your taxable income as low as you can get it especially if you have a sizeable ira.


those rmds on a 1,000,00.00 buck nest egg can run 40-50,000 a year in income you have to take whether you need the money or not as well as have to pay tax on it.


that makes all the difference in effecting alot of other deductions.

want to take some classes? the eductation credit is phased out , medical deductions are based on income, your social security could be taxed... maybe your over the limit for getting certain things like those stimulus checks alot of us never got because of income... etc....


your heirs can inherit those roths tax free and generate tax free income for generations. unlike a tradional ira which gets diminished after 70-1/2 and the goose thats laying the golden eggs gets killed off a little each year the roth over time grows more and more . even a small roth passed on and invested properly can provide millions for your heirs over generations as compounding does its thing.


lots of advantages and lots of other ways to even better your plan around the roths once you know the tax issues are resolved and whats left can be counted on as the amounts you will have.

it makes it much easier to work immeadiate annuities, life insurance tax planning etc in to the plan when you know your bottom line.

to hard to plan around a partner who is getting a share of my retirement money but i dont know how much he is leaving me with.



you folks hear me stress planning all the time and this is part of what planning constitutes .... its not about just flinging money into stocks and funds and crossing your fingers. its all about planning every step of the way and doing things on your time table, your terms and your plan, not the markets or the governments plans for you.




again im not an adviser, im not in the business and everything i mention has to be researched by you.......l you know what they say about free advice on the internet ha ha ha

[mathjak107]

one caveat to the whole thing is whether you intend to pass on any of these retirement accounts or not.. if it looks like your going to spend it down it may not pay to convert..the big value here is the wealth passing ability for your heirs..

there arent many of us who may be in a higher tax bracket when the pay check stops as compared to working... whether you think your tax bracket will be higher or lower is a guess if they change rates on us.

it may be a moot point from a rate standpoint for whether to convert or not, but if you have intentions of having some money to pass on thats where it shines.

[MadManofBethesda]

Originally Posted by mathjak107

there arent many of us who may be in a higher tax bracket when the pay check stops as compared to working... whether you think your tax bracket will be higher or lower is a guess if they change rates on us.

I think that you just eliminated the main reason that Ed Slott says that you should convert now: that taxes are only going higher from here. If someone doesn't think that taxes are going to go higher, then there is no real reason to convert and pay taxes now. In fact, he states that the "big lie" everyone was told was that they would be in a lower tax bracket in retirement than they were when working.

I know that he also talks about estate planning and passing on money tax free to heirs, but that was not his main reason for promoting Roth conversion now. In fact, I believe that he is a big proponent of using life insurance for that.

[mathjak107]

the tax issue is kind of a big wild card... i myself have mixed feelings about whats next. on one hand 40 years of history says taxes for most of us are headed lower ... every year for the last 40 years or so taxes have been lower and lower as all the brackets are raised allowing more and more income thru at lower brackets...

coupled with 80 million voting retiring baby boomers that i think any political group will be afraid to tell they are raising their income taxes....

on the other hand you never know when that will end and reverse and all bets are off for our kids generation..

to me the tax rate issue isnt as solid a given as we arent sure where taxes will be in our lifetime. the power of the generational compounding is awesome , thats a given.. invested wisely those roths compounding far eclipse the required withdrawls and can create millions over a generation of heirs or longer....


the life insurance isnt used as much in conjunction with the roth as it is with the tradional ira's... its used more if you didnt convert.

first option you change the beneficiary on your traditional ira's and 401k from your wife to your kids..
you now dont leave your wife a tax infested ira but instead you take some of the ira money and buy a life insurance policy on yourself with your wife as benficiary leaving her equal value in clean tax free money.

the kids get whats left in the ira after the life insurance and living expenses are paid from it...they will take distributions based on their lifetimes which could defer taxes decades more then had your wife gotten it.

option 2 is your kids inherit the tax infested regular ira. you get them a small life insurance policy on you that just covers the taxes due.

option 3 is take all the ira money leverage it with life insurance that will pay many more times what its worth after taxes and everyone gets a tax free windfall.


basically the roths are golden as is as they are tax free, can be inherited tax free and aside from the small mandatory withdrawls the heirs have to take they can grow tax free over your kids lifetime and then be inheirited by grand kids. in fact make your grand kids beneficiaries and that roth can go on for over 100 years. of course you can use the roth money too to buy life insurance but the life insurance money they get wont compound tax free over their life times and the lifetime of grand children as would the roth,,... it still may be worth it depending how long you live and what you paid in premiums. it but not as powerful as the roth and its generational compounding.

ed's idea is use the life insurance to trade taxable forever money from traditional iras and 401k accounts into leveraged never taxable money. use the roths to pass never taxable money to heirs.

i have the book which i just lent out but if you would like madman ill ups it to you and you can read it. maybe we will start a little forum list and pass it on to the next person....


if i get the book back eventually ill just consider it a bonus ha ha