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I've never heard of investing untaxed $ then getting it back, plus any gains, tax free later in life.
What the heck is he's talking about ?
It depends how much retirement income you have, and what sources they are coming from.
Hopefully you know about the standard deduction? For tax year 2022 it's $25,900 for a joint return. In addition, for each person age 65+ there's an additional deduction of $1400. So for a joint return with both spouses 65+ you do not pay any federal tax on taxable income up to $28,700.
The rules for taxing Social Security are complex, but they favor people with lower incomes. The amount of your SS check that counts as taxable income is always less than your benefit, and in extreme cases none of it at all counts as taxable income. The upshot is that for modest incomes, where little of the SS benefit is counted as taxable income, most of the standard deduction remains to be counted against other income such as taxable 401k withdrawals.
For example, a joint return with $25,000 in Social Security benefits and $25,000 in taxable 401k/IRA withdrawals has zero federal tax liability, if both filers are age 65+.
It depends how much retirement income you have, and what sources they are coming from.
Hopefully you know about the standard deduction? For tax year 2022 it's $25,900 for a joint return. In addition, for each person age 65+ there's an additional deduction of $1400. So for a joint return with both spouses 65+ you do not pay any federal tax on taxable income up to $28,700.
The rules for taxing Social Security are complex, but they favor people with lower incomes. The amount of your SS check that counts as taxable income is always less than your benefit, and in extreme cases none of it at all counts as taxable income. The upshot is that for modest incomes, where little of the SS benefit is counted as taxable income, most of the standard deduction remains to be counted against other income such as taxable 401k withdrawals.
For example, a joint return with $25,000 in Social Security benefits and $25,000 in taxable 401k/IRA withdrawals has zero federal tax liability, if both filers are age 65+.
Your bolded example is sounding very close to what this accountant was saying.
Joint return, 25K each social security income (untaxed) and 25K taxable IRA withdrawals would have zero federal tax liability.
Your example or the example I just wrote sounds like pretax $ put into a traditional IRA would result in zero federal tax ever being paid on both contributions and withdrawals.
Equaling tax free invested $ and tax free gains on RMD $
I think I will make no changes this year out of fear of getting it wrong. It is so complex. I thank everyone who has responded.
Your example or the example I just wrote sounds like pretax $ put into a traditional IRA would result in zero federal tax ever being paid on both contributions and withdrawals.
Yes.
Quote:
Originally Posted by movedintime
I think I will make no changes this year out of fear of getting it wrong. It is so complex.
Keep in mind that "some of each" is a perfectly fine solution. Unless a person has other sources of taxable retirement income (e.g., pensions, wages, taxable bank or brokerage accounts) I'll wager the best answer is likely "some of each".
Because of the progressive nature of the tax code, the tax liability on 401k draws of say $10k or $20k annually tends to be pretty light, even if you're collecting Social Security. If your only significant sources of retirement income are Social Security and 401k/IRA accounts, I doubt it would be a mistake to have a few hundred thousand dollars in a Traditional account.
The folks who end up regretting the Trad 401k tend to be the ones who have plenty of retirement income from other sources... pensions, taxable interest/dividends, part-time work. They contributed to their 401k as a way to reduce their tax bill while working, without considering future consequences. When they are finally forced to take RMDs they are paying taxes in a high bracket, and possibly triggering higher Medicare premiums. It can be a real mess. These people should be using Roth accounts exclusively.
they found that even if tax rates didn’t change in retirement the roth could give you up to 20% more over a typical career that starts low and rises in income and brackets over decades
according to t.rowe's study:
Most investors remain in the same tax bracket during retirement. However, if an investor’s tax bracket happens to drop by at least 9% and they are over 50 years old, the Traditional IRA becomes more valuable.
A 65-year old would only need a 6% drop in their tax bracket for a Traditional IRA contribution to be more advantageous than the Roth IRA in retirement.
If I were to do it all over again from the beginning of my 40 year corporate working career, I would have put retirement savings beyond the 6% 401K (matched 50% by my employer) into a Roth IRA.
If I could do it all over again, I'd join Microsoft as employee #3.
Hopefully you know about the standard deduction? For tax year 2022 it's $25,900 for a joint return.
Indeed, we stuff Roth conversions into the standard deduction every year, essentially taking money we were never taxed on and turning it into money we will never be taxed on. The rest of our income needs from capital gains and dividends all fall in the 0% income bracket, which I believe is about 83k now for married filing jointly.
Location: Was Midvalley Oregon; Now Eastside Seattle area
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OP,
I imagine there are 1 or 2,3 scenarios where a Roth would be non-advantageous. It's an exercise of counting sheep for me.
Probably more reasons not to put too much into tax advantaged programs, if you are only thinking for yourself and spouse; Too much RMD income also becomes a challenge when one has a fugal mentality. You will just have to sleep on this to discover, why.
Sweet Dreams.
YDMV.
OP,
I imagine there are 1 or 2,3 scenarios where a Roth would be non-advantageous. It's an exercise of counting sheep for me.
Probably more reasons not to put too much into tax advantaged programs, if you are only thinking for yourself and spouse; Too much RMD income also becomes a challenge when one has a fugal mentality. You will just have to sleep on this to discover, why.
Sweet Dreams.
YDMV.
one does not need to spend the all of the rmds ..in fact most can’t , it has to be reinvested in the taxable side in order to keep spinning off the income they need .
we simply take my wife’s rmds and put them back in the same fund in the taxable account.
when rmds are spent it is way to easy to have a higher draw rate then one should
Last edited by mathjak107; 03-24-2023 at 02:04 AM..
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