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I am in Richmond, VA, so only 2 hours south of DC metro. Indeed, your observation of mindset and investment strategies for retirement is very acute! My work mates all take the same similar approach as well. And we all have healthy pensions. Interesting!
To the OP: SS is never more than 85% taxable, I thought, so where did 87% come from? Since you already have lower tax vehicles in your current after tax income (LTCGs, etc), it makes even more sense to get as much in to your Roth as possible, because even moving IRA funds out beyond the RMD amounts, will do the same thing eventually. (Raise your income to he point where 85% of SS is taxed) . You are just paying an extremely low rate for the spendable income you have now. If that income was earned income, you would be paying the high rate you are complaining about, just like everyone else. Most unusual but a Nice position to be in.
We are in many ways a combination of our financial learnings and associations. It is so easy at work and the neighborhood to know those with a similar mindset and spousal situation and to share notes and most importantly retirement culture. It is when you come in a forum like this that you realize that what is the norm to you is not everyone. Our mindset extends from Richmond to the Pennsylvania Maryland border and is a good thing. I say it is a good thing because it sets a high cultural level of financial expectations. You have a spouse and others know your relationship and there is a expectation of how you will treat that in retirement. Others elsewhere can consider us snooty and say no others don't think like us be we know that to not be true. My youngest is in NOVA and he and his wife are very well paid as are their friends and it is amazing to listen to them talk about their lives and futures and expectations. Talk about having it nailed:crying! Many have located their because of income and career advancement and how that translates into long term goals etc etc. They feed on each other. You will enjoy ER and of course Bog as it gives you even more food to digest. As they say in the commercial stay thirsty my friend as there is still excitement in the game.
Wow. Thank you so much. Mostly you have confirmed that I am sunk. I may review the posts separately and try to address places where more explanation from me will clarify. But for now:
To those that seem to say, "Pay what you owe", I will say this is what hurts. I have friends that went through life spending like drunken sailors. Credit cards at the max continuously. Leasing fancy cars every three years. Weekly trips to the casino. While we scrimped and saved to max the 401k/traditional and Roth. I did all the maintenance on our vehicles (like changing a burned piston in my garage). Made them last 10 or 15 years, etc. I did all the house repairs, appliance repairs, etc.
Now those others have little or no MRD to worry about and are living like we are. They have as much spendable funds as we have. And all through life they were expending at many times our rate.
I have four grown children and I have been advising them to dump as much into their 401ks as possible. Maybe I need to rethink that advice.
Those are my first thoughts on these great replies. I am sure there will be more after I review and understand the Tax Torpedo.
Thanks again.
Pete
If you roll your tax deferred accounts into a Roth, be sure to move to a state with no income tax first. Your state will still come after you for the money if you just move for the tax advantage and go back, so do some research on what they will accept. In my state, they just state that you have to have no intention of returning.
Wow. Thank you so much. Mostly you have confirmed that I am sunk. I may review the posts separately and try to address places where more explanation from me will clarify. But for now:
To those that seem to say, "Pay what you owe", I will say this is what hurts. I have friends that went through life spending like drunken sailors. Credit cards at the max continuously. Leasing fancy cars every three years. Weekly trips to the casino. While we scrimped and saved to max the 401k/traditional and Roth. I did all the maintenance on our vehicles (like changing a burned piston in my garage). Made them last 10 or 15 years, etc. I did all the house repairs, appliance repairs, etc.
Now those others have little or no MRD to worry about and are living like we are. They have as much spendable funds as we have. And all through life they were expending at many times our rate.
I have four grown children and I have been advising them to dump as much into their 401ks as possible. Maybe I need to rethink that advice.
Those are my first thoughts on these great replies. I am sure there will be more after I review and understand the Tax Torpedo.
Thanks again.
Pete
If they have no MRD and if they spent all they had and you have much more saved up how can this be that they have as much spending money as you? Doesn't this mean they have less cash to spend than you?
Now those others have little or no MRD to worry about and are living like we are. They have as much spendable funds as we have. And all through life they were expending at many times our rate.
-- How and why do you think that is? Did they make more than you? Did they have better or different job benefits than you?
-- Did they save for retirement but use different vehicles for doing so?
-- Are they retired already? Or will they keep working longer than you will?
-- Could it be their situation is not what you think it is?
I read your posts and while the maths works out such that if you look at the ratio of the total tax of all income (SS + RMD + other sources of income) over the RMD (especially when the RMD is a very small part of the total income), the percentage is very high, it still does not mean that the RMD itself is taxed at that rate.
The way I see it, without a pension or with tiny pensions as in our case, it is still much better to pay taxes on RMD of your IRA or 401K than not having any RMD at all.
BTW, I googled 'SS Tax Torpedo' and found this article
1.Under age 70: Contribute more often to a Roth IRA.
2.Between age 59.5 and 70.5 and retired: Take money out of your traditional IRA
3. Age 62 to 70? Delay Social Security
Since our income is above the Roth IRA contribution limit, we will only be able to exercise option 2 and 3 which are what I had planned to do before reading the article - I will convert portions of our 401K or IRA to ROTH IRA after retirement and before taking SS. I have not done the maths to see if we may be able to avoid the torpedo like the Perino's quote in the article but expect that actions 2 & 3 will help to reduce the torpedo occurrence frequency.
the whole tax thing usually ends up being a catch 22.
the folks who would benefit the most from delaying ss and taking out ira money at no to low tax rates will usually be the folk's who have smaller retirement incomes and smaller savings .
many can't afford to lay out 8 years replacing ss from savings without running dangerously low.
while they can take up to 42k out of retirement money and pay less than 5% tax or up to 22k or so and pay zero tax the reality is most can't afford to do that without ss and taking ss may get their ss taxed trying to pull that ira money out to lessen rmd's , as well as bump them in to the 25% marginal bracket . .
on the flip side is those who can afford to delay ss until 70 likely have much more in assets and higher incomes which usually means they end up in higher brackets anyway.
while i have a 7 figure ira we also get 50-60k a year in dividends and distributions from our taxable account as well as a small pension.
right off the bat we filled the 15% bracket so we are 25% regardless.
more typically i think that will be the outcome . those that can afford to delay ss will be least likely to benefit tax bracket wise from spending down ira money. the deferred gains may be the better deal.
don't forget you are growing money on money you wouldn't have in the deferred account if it was spent down and taken out .
the rmd's on that money is found money in that sense.
if you can afford it here is what i would do if i was delaying . i would pull out the amount of money ss would have paid me from the traditional ira's and convert it to a roth from 62-70.
but you do need substantial assets to lay out which i think will be the deal breaker.
Last edited by mathjak107; 05-28-2015 at 03:19 AM..
I hate taxes like most people.
And all this shows the overly complex income tax system needs to be simplified and overhauled.
It has too many special groups and then taxes other groups excessively to make up for under taxing the special groups.
If you roll your tax deferred accounts into a Roth, be sure to move to a state with no income tax first. Your state will still come after you for the money if you just move for the tax advantage and go back, so do some research on what they will accept. In my state, they just state that you have to have no intention of returning.
I'm in NY. I have heard they are like vultures. People have had to provide credit card evidence of where they have been purchasing for the last year. Or in one case the state tracked down someone who returned to NY for the summer and somehow got a NY state resident's fishing license. Thus he was a NY resident and owed the income tax.
So, I can't risk claiming I am a resident of another state for 2015. But by January 2016 I will be a resident of FL. And will have been for months.
-- How and why do you think that is? Did they make more than you? Did they have better or different job benefits than you?
-- Did they save for retirement but use different vehicles for doing so?
-- Are they retired already? Or will they keep working longer than you will?
-- Could it be their situation is not what you think it is?
I think it is a matter of them not caring about living on the edge. It seemed like the big contest between husband and wife was who could get one of the credit cards far enough below the maximum so they could buy their toy before the spouse spotted it and got the toy he/she wanted.
When things got tight, "Oh, I lost my diamond earring but the insurance will pay". A few months later, "Oh, hubby found my earring in the couch cushions". "Oh, a log rolled out of the fireplace and burned our rug. We don't have any spare material so the insurance company will replace our whole room". A few weeks later, "Oh, we found some spare rug, can you help us replace the burned patches?"
"Oh, what homeowner's insurance do you have? Our company won't renew our policy".
I wonder what one would be giving up by leaving New York in hopes of finding lower taxes someplace else. Surely there would be something...
Let's see what I will be giving up:
Property taxes that are 2 to 3 times more then friends pay in NC, TN, and FL.
Toll roads,
Gas prices 20% or more then the states listed above and 30% more the VA.
Sales tax 2 or 3 points more then the above states.
Reading about how the speaker of the state house is arrested for crimes,
Reading about how the majority leader of the senate is in the same situation.
A past governor who has to resign for participating in prostitution.
The opportunity for seeing my tax dollars go to fund higher education for the illegal immigrants.
The possibility of going to prison for 7 years for having too many bullets in a gun....well I don't actually own any guns but....really, 8 bullets in a lawfully registered gun.
OP was hoping for a relatively tax-free retirement. But with all the "other" low-tax income and the size of the IRA (seven figures) and required RMDs, it's not possible.
As Perry says:
.
It's really not as bad as it sounds. For now, this is really true:
Tax-deferral means exactly that. At some point, the tax is no longer deferred and must be paid.
20/20 hindsight - but projecting the low-tax income out when OP was in his 50s, deposits to Roths fifteen-twenty years ago is probably what OP should have been doing. Too late we learn.
As projected, I am in a lower tax bracket retired than when I worked - but that won't always be the case. So, I am doing Roth conversions now, to prevent escalating RMDs and bracket creep - and to leave tax-free money to heirs.
Actually I was going the Roth route also. My wife and I rolled tradationals to Roths in 1997 and we socked money into those IRAs every year for over 15 years. So that makes me happy. Something to pass on to the kids.
But all this has me really doubting the wisdom of "tax deferred".
I just did a little, "What if". I said, "What if I had an additional large expense in 2014. Something like $20,000 for medical expenses or something". And the only source to fund it was this traditional IRA. And I wanted to "Render onto Caesar the things that..." By that I mean withdraw enough from the IRA to cover the tax due on the withdrawal. Like paying the estimated tax when I make the withdrawal. This is what I found. To net $20,000 after taxes I would have to withdraw $71,000 from the IRA based on my 2014 tax return.
That is, a tax of about 72 cents on every dollar withdrawn goes to taxes. Not as bad as the 87 cents from before because the SS hit and LTCGQD hit has less effect as the amount of withdrawal increases.
More food for thought.
Pete
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