I'm nearing 70.5 and Will Have to Take an RMD From a Traditional IRA. OUCH!? (grandfather, salary)

[ComeCloser]

If you live in New York and receive a pension that's paid by the state of New York, you don't have to pay state income tax on your pension income.

In New York, all Social Security retirement benefits are exempt from taxation. Income from retirement accounts or a private pension is deductible up to $20,000.

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I totally dont get it if the above is true.

That said, I have been told to convert my TDA into a NYC Roth. Take out $10K a year from the TDA, pay $2K in Federal taxes, and deposit the rest in the NYC Roth, which will be tax free when I withdraw.

I totally dont get doing this either, but reading this thread makes it seem like something worth doing.

[hikernut]

Originally Posted by selhars

I was thinking the same. Just curious about others' thoughts. I think 24% would be as high as I'd go also. And I'd try not to go that high. Just have to see when I get closer. I'll be retiring right after the Trump tax brackets expire (I prefer to just call it a tax plan, I know too many people who's taxes went UP to just naively call them tax cuts...anyway....) So who knows what the bracket limits will be. Regardless, 25% will be my cut off for converting.

Also, be sure to consider any impact that these conversions might have on your Medicare B premium (2-year look back).

[hikernut]

Originally Posted by Lillie767

The real tax torpedo occurs when your spouse dies. Our income consisted mostly of Social Security and RMDs from IRAs and 401(k) plans. We filed MFJ. DH dies. My income is substantially the same since I must continue the RMD's.

A very good point. I started using my company’s Roth 401k (instead of deductible 401k) at age 54 because of this, and also the SS tax torpedo. I should have made the change a few years before that, but better late than never. The Roth will be left to grow, and be tapped only after the taxable IRAs are empty.

[leastprime]

P #141

Originally Posted by selhars

Can other's share theirs, please?

Glad you can skip an RMD year, I bet?

I've got about 5 years until retirement at 65. (Single, no kids, paid off house)
At 65, I'll have one pension of 19,200, another about 5,600 a year.
May hold off on Soc Sec. since FRA isn't until 67.
At 72 estimated RMD 40,000. (from tax deferred accounts)
(and I'll have non-retirement savings, and a small Roth IRA)

But a lot can change in 5-12 years...tax laws, investment regulations, etc. As of right now it looks like I'll be in the same general tax bracket.

And from 65 - 72 I won't be able to move THAT much to of my Trad IRA anyway.....So I don't know if it's worth worrying about the "torpedo" or not.

I just increased my 401K to keep in the 12% tax bracket. That jump from 12-22% is a kihller.

I/we did some preliminary tax planning in 2008 (58/62), 2012 (62/64), and again in 2015 (65/68). Current age 70/73.

RE: RMD planning.
We stressed Roth401ks & RothIRA's in our 50's, giving up some current tax year benefit in favor of longterm.
We converted some IRA to Roth, a couple of times.
We bought deferred GLWB annuities with IRA, Roth, taxable $.
We liquidated some IRA, most of Roth, and some taxable to buy income & depreciating property.

Federal 2019: 5% effective tax; 10% marginal tax. Filing1040, D & E and a bunch of schedules.
Annuity GLWB Income qualifies for RMD. We just took, Jan 2021, 202x contract year-annuity income in a lump sum and I/we not sure whether to use it for 2020 or for 2021 tax years. I/we unsure if we will take 2021 annuity income because I am not versed in the sunset of Trump's "tax cuts"/Cares Act 2020 (???)

We live far below our income and thus we can manipulate and optimize the Income. We have a lot of headroom to the next tax bracket. No state income taxes. Standard deduction. We use a CPA.

[selhars]

I suppose the answer is: "it depends," but does it make sense to delay Soc. Sec. and tap the Trad IRA? (if you need to, say between 65 and 72)

Does that help lower the effect of the torpedo?
Does delaying SS make the inevitable better or worse -- or it doesn't matter much? Six on one hand, half a dozen on the other.

[mathjak107]

Originally Posted by selhars

I suppose the answer is: "it depends," but does it make sense to delay Soc. Sec. and tap the Trad IRA? (if you need to, say between 65 and 72)

Does that help lower the effect of the torpedo?
Does delaying SS make the inevitable better or worse -- or it doesn't matter much? Six on one hand, half a dozen on the other.

Each situation is different ....some may be able to delay ss and spend down their iras by the standard deduction tax free for 8 years ....that can be hundreds of thousands of tax free dollars in ira income for a couple .

When we helped beta test Fidelity’s in house software for optimizing social security while it found the highest payments , the fact it did not interface with your personal situation and taxes had them pull it from use.

There is no one size fits all answer

[dwnmo]

Originally Posted by hikernut

A very good point. I started using my company’s Roth 401k (instead of deductible 401k) at age 54 because of this, and also the SS tax torpedo. I should have made the change a few years before that, but better late than never. The Roth will be left to grow, and be tapped only after the taxable IRAs are empty.

You probably are aware of this, but in case others are not - the Roth 401k IS subject to RMD's at 72 whereas a Roth outside of a 401k is not. You may want to rollover that Roth 401k to an outside Roth before you hit RMD age.

[hikernut]

Originally Posted by dwnmo

You probably are aware of this, but in case others are not - the Roth 401k IS subject to RMD's at 72 whereas a Roth outside of a 401k is not. You may want to rollover that Roth 401k to an outside Roth before you hit RMD age.

Good point. Yes, I already have a Roth IRA and will do exactly as you describe once I’ve retired. It’s already more than five years old.

[hikernut]

Originally Posted by selhars

I suppose the answer is: "it depends," but does it make sense to delay Soc. Sec. and tap the Trad IRA? (if you need to, say between 65 and 72)

Does that help lower the effect of the torpedo?
Does delaying SS make the inevitable better or worse -- or it doesn't matter much? Six on one hand, half a dozen on the other.

Unfortunately this is an “it depends” answer. IMO, delaying SS is a good strategy for many people. This is my own plan. It’s the mixing of SS benefits with other income that creates the torpedo brackets.

First step is to understand combined income. This is simply 50% of your SS benefit plus all other income (Roth withdrawals don’t count, but non-taxable interest is included in the calculation). If you are able to stay below the specified limit for combined income ($25k for individual return, $32k for joint return) you will not trigger the torpedo.

Once you hit the torpedo bracket, every additional dollar of other income (say an IRA withdrawal) adds $1.85 of income to your AGI. This is what creates the higher phantom (i.e., torpedo) tax bracket. This process of adding $1.85 per dollar continues until all of the SS benefit gets consumed. Let’s say your SS benefit is $20k per year. Once you’ve hit the combined income threshold, every additional dollar you pull from the IRA “consumes” a dollar of that SS benefit and adds $1.85 to your AGI. So in this example, if enough money is pulled from the IRA you would ultimately add $17k (85% of $20k) to your AGI. At that point you will exit the torpedo bracket and all additional IRA withdrawals are taxed dollar for dollar as usual.

Finally, a few observations...

If you expect to be close to the combined limit, but over a bit, life really is not too bad. Let’s say you are over by $1000. That means you’re adding an extra $850 to your AGI. If that happens in the 12% bracket you are adding just $102 to your tax liability.

Delaying SS can be a good strategy if you are over the combined income limit, but your income is not high enough to have reached the top end of the torpedo bracket. Here you are adjusting the mix of income... more from SS and less from IRA withdrawals. Since SS is only counted at 50%, your combined income will be lower even if your total income is the same (as the case of not delaying SS).

The other scenario is if your other income is high enough that it’s not possible to avoid the entire torpedo bracket. Here it might make sense to do the opposite. If you take SS early with a smaller benefit, the amount of income subject to the torpedo bracket will be less.

Now the disclaimer. This is only looking at federal taxes. To make a good decision one also needs to consider state income taxes. Also, delaying SS changes the nature of your income... less exposure to markets assuming you keep your asset allocation the same.

That is the torpedo in its simplest form. If we add in LTCG or qualified dividends there are more scenarios.

Edit: One more thing I forgot to mention. Note that it is possible to exceed the combined limit, but have no tax liability. This will tend to happen in cases with a large SS benefit and small IRA withdrawal. Consider a single filer with $40k SS benefit and $10k in ordinary income. That results in a combined income of $30k, which is above the single filer threshold of $25k. However, the resulting AGI is less than the single-filer standard deduction.

[leastprime]

IRA:
I play the stocks in my IRA.
No worries on cap gains/losses.

Go see a CPA, They have a slow period now until March 01.
charitable trusts, charities, MYGA, possible RE trusts(?)