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Geoff I think you have thought it out very well. I am sure others will say the same. Good luck on your work with Roth. We have the opposite effect. I have pensions and very little Roth. I am sure we will get wacked for that. We will convert and use our savings before we take up SS. We will have enough income with pensions (2) and savings to make that an easy transition.
It's a work in progress. I'm just glad I worked through the tax implications of 401-K vs Roth 401-K before it was too late to do anything about it.
I'm glad you found out anout the torpedoe while you still hve time to do something about it. Finding out like Petecal did after starting SS is a shock, but finding out after you turn 70 is worse because then you literally are stuck with no choices but to pay! I'm also 57 and will also get a large pension, like golfingduo, so I'm going to be at the bottom of the 25% bracket the instant I retire, without SS, just on mine and my wifes retirement income. Luckily, I have the ability in my companies 401k to make non Roth after tax contributions up to the 22k max, which I then convert over to my Roth IRA with Fidelity. I Only have to roll the earnings on the after tax account to my tIRA. Once I retire, I will see how much I can convert from my tIRA to the Roth before I collect SS.
I deleted the prior parts of this post to comment on the last part--
Adendum. I just notice something you mention that any gifts to family would have to come from the tIRS's. I am sure that it is just a gift from after tax income and you are allowed up to a $10k gift per year which they will have to claim as part of their income. It would not have to come from any particular piece of your portfolio. They would be paying the taxes to their income.
Actually any individual is allowed to "gift" another individual 14K per year which is NOT counted as income to the person receiving the money. How the giver gets it is up to him/her...salary, tax-free Roth fund, cashing a CD, refund from income tax, RMDs that aren't needed/wanted to reinvest...
The person who receives it has to enter it on their tax forms but it is not taxed as income...
IF you give that same person more than 14K in one calendar year, I think there are two,options for tax-free gifting as well...you can make a 5 yr lump sum (14x5) and gift no more until year 6 or you/recipient can file a form every year with income tax filings that tracks the amount over 14K towards the lifetime 5MM tax free gift limit
We have been gifting our son/daughter and their spouses and grandson the last couple of years...
Grandson's money went into 529 that we are trustees for...
Using our money which came from taxed income as part of estate planning to reduce incrementally and avoid estate taxes at death...
i'm 67 now. I did a test case and tried what would happen if i had to take the mrd this year. This is hard to believe but 89 cents of every dollar of the mrd went for taxes. 11 cents ended up in my pocket. I need some people to interact with to find a way to reduce this tax burden.
Before everyone tells me i made a mistake. Some details:
As i said, i get to keep only 11 cents out of each dollar of the mrd. But my marginal tax rate is about 28% on the federal and 6% on the new york state. I arrive at that figure by increasing my mrd by $100 and seeing that my taxes go up by $28 on the federal and $6 on ny state.
As for why so much of my mrd goes to taxes.
(1) i have very little taxable income. Total federal taxes are less then $300.
New york state income taxes are actually more then the federal taxes (by $6.00).
(2) very little of my ss is taxed.
(3) the only income over ss is qualified dividends and long term capitol gains.
Both very favorable tax wise at the federal level but not the state level.
Hence why the nys tax exceeds the federal.
(4) the traditional ira is very large.
Almost 24 times as large as my agi before the mrd.
(5) the mrd exceeds my before mrd agi by 110% thus more then doubling my income.
(6) that makes most of my ss taxable. It also takes away most of any advantage of the qualified dividends and long term capitol gains.
So, for all those years i did without so i could put as much as possible in my 401k (which became this traditional ira) and now i find most of it goes to the government.
So, how can i keep more of it?
(a) convert it all to a roth and pay a really gigantic tax, more medicare, etc etc etc? But then have almost zero income thereafter.
(b) convert to a roth is stages before age 70.5?
(c) convert smaller amounts for years?
(d) some kind of annuity?
Any help would be greatly appreciated.
Pete
1.move to a republican state!!
2. Never vote the tax & spend party into power again!!!
1.move to a republican state!!
2. Never vote the tax & spend party into power again!!!
So Republican states don't need to file Federal income taxes? Who knew?
For my personal financial planning, this whole Social Security "tax torpedo" thread has been enormously useful. I imagine most people reach age 70 1/2 and get completely blindsided by it. If you know about it a decade in advance and you think you might be running into it, you at least have the option to plan your way around avoiding the taxes.
Let's keep the politics out of good thread....I don't think the required RMD deal will ever impact me. Started switching over to contributing to Roth IRA's last year versus traditional and 401K's. And this year was able to convert about $19K worth into Roth's. And once my wife retires and starts drawing SS along with me we'll be able to convert at least 50K a year. And we only have about $200K in traditional. The rest is either Roth or in taxable accounts.
But... if I was in the O.P's position. I'd be tempted to "rip the bandage off". Just for the satisfaction of saying...."done with taxes for this". It's almost like paying off your mortgage early. You can make case that you are better off with the mortgage and investing the difference. But you have the satisfaction of not having the bill anymore.
I had to go over this very topic again with 2 co-workers that insisted I was wrong. They both literally would not believe that more tax deferred deductions would cost them more in taxes after 70, than Roth contributions and conversions while delaying SS. But if you have a large enough IRA to worry about RMDs, then presumably you will have a substantial SS and living off the IRA while delaying, if you don't have other unavoidable income, like a pension or lege inherited IRA, will save you many thousands in taxes, if you can live below the threshold level where 85% of you SS is taxed. Just substituting $60k of SS income at 71 for $40k SS and 20k IRA, in the 25% bracket saves you over $500.
But... if I was in the O.P's position. I'd be tempted to "rip the bandage off". Just for the satisfaction of saying...."done with taxes for this".
While I can understand the temptation, a one time monster withdrawal would put him in the 38% or higher Fed tax bracket for that year, so it would likely make more sense to just take withdrawals enough to max the 25% bracket each year until he had RMDs that kept him under the torpedoe limit. What he has to do is simulate his tax returns different ways and add up the total tax paid for the same time value of the money withdrawn, and not get hung up on percentages. He only has less than 4 years before he is 70 1/2, so his options are limited, and why I recommended that earlier. If he makes large conversions to Roth, over the next few years, he may pay more in taxes up front, than taking smaller sums over a longer time, but then all his earnings on the Roth would be tax free forever, which could very possibly save him more in the long run, depending on how long he lives. Without exact financial numbers it is not possible to be sure, but his "faked" federal forms suggest it makes sense to do just that. He would really benefit living in an income or retirement income tax free state during that time period!
The real future threat would be if somehow the tax code is totally revised and we go to some sort of VAT system.
Then your outflow is taxed no matter whether your money comes from taxable, Roth, savings, salary...
If you paid higher taxes now anticipating tax relief later, then you have really overpaid.
Does that seem likely?? Probably not very as long as there is a close balance between political parties...
But the future can turn in ways we don't anticipate...
Plus if you are doing this while on Medicare and w/o SS be aware that higher incomes have a time-lag effect on Medicare rates...
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