Is my IRA really an IOU to the IRS??

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slipp1229
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Is my IRA really an IOU to the IRS??

Post by slipp1229 » Tue Aug 02, 2016 3:19 pm

A quick Retirement Planning question to the Boglehead community:
As I approach early retirement at age 59 in 6 months, I was wondering if there is anything that could be done now (pre-retirement) with my sizeable Regular IRA's to lessen the tax burden when I finally start cashing them in many retired years down the road? As often stated in this forum, I plan on using my non-qualified (taxable) retirement savings first and moving to my deferred and tax sheltered portfolios much later in retirement... Hopefully, not before MRD at age 70.5. Anything to be done now or in the near future to lessen tax impact? :shock:
Thanks in advance for any advice!

Edited to remove "Roth IRA" :oops:
Last edited by slipp1229 on Wed Aug 03, 2016 5:41 am, edited 1 time in total.

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bottlecap
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Re: Is my IRA really an IOU to the IRS??

Post by bottlecap » Tue Aug 02, 2016 3:29 pm

Convert some traditional into Roth?

You shouldn't be surprised you will pay taxes on a traditional IRA paid for by income that was never taxed in the first place. That was the dealing going into it.

JT

soboggled
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Re: Is my IRA really an IOU to the IRS??

Post by soboggled » Tue Aug 02, 2016 3:30 pm

There is substantial value in deferring taxes and letting investments grow tax-free.

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Artsdoctor
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Re: Is my IRA really an IOU to the IRS??

Post by Artsdoctor » Tue Aug 02, 2016 3:36 pm

Yes! Your IRA is "co-owned" by the federal government (and perhaps the state). You earned the money (and/or the benefit) but never paid your taxes on it. It is "tax-deferred," not tax-free.

The idea is not to pay nothing to get it out, it's to minimize the tax bite as much as is reasonable. We can't really recommend any specific strategy without knowing your other tax situations, but gradually converting some of the money in the IRA to a Roth could results in a lower overall tax bill, although everyone would have to do their own math.

Additionally, if you contributed to your tax-deferred account while working in a high tax state, you can move to a low tax state (or no tax state). But you may pay higher taxes elsewhere to make up for it (real estate, sales tax, etc.).

dbr
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Re: Is my IRA really an IOU to the IRS??

Post by dbr » Tue Aug 02, 2016 3:39 pm

But yes, an IRA or a 401K is an IOU to the IRS because one of the rules is that there is an RMD. As someone else said, that was the deal going in. Note that it is possible to be positioned so that there is still no tax paid. See posts by livesoft. Not everyone may be in such a position.

Oh, we should mention delaying SS to age 70 helps keep that intervening time span open for Roth conversions if things otherwise fit.

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Re: Is my IRA really an IOU to the IRS??

Post by dbr » Tue Aug 02, 2016 3:58 pm

Artsdoctor wrote:Yes! Your IRA is "co-owned" by the federal government (and perhaps the state). You earned the money (and/or the benefit) but never paid your taxes on it. It is "tax-deferred," not tax-free.
Governments certainly do not own part of anyone's retirement accounts. If you think that is true I would like to see where that ownership is accounted for in the assets of the Federal Government or of a state government.

The law providing for these accounts is arranged so that some withdrawals are required and those withdrawals will constitute taxable income. The taxpayer may or may not actually pay tax on that income. That is derived from the savings having been deferred from taxation in the first place.

I don't know why people need to assert this "ownership" thing when tax law explains everything that needs to be known. It is certainly not necessary for the government to assert a right of ownership over tax deferred savings to have authority to tax the income whether when it is earned or later. Why offer such a bizarre explanation for a simple thing?

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Re: Is my IRA really an IOU to the IRS??

Post by triceratop » Tue Aug 02, 2016 4:06 pm

dbr wrote:
Artsdoctor wrote:Yes! Your IRA is "co-owned" by the federal government (and perhaps the state). You earned the money (and/or the benefit) but never paid your taxes on it. It is "tax-deferred," not tax-free.
Governments certainly do not own part of anyone's retirement accounts. If you think that is true I would like to see where that ownership is accounted for in the assets of the Federal Government or of a state government.

The law providing for these accounts is arranged so that some withdrawals are required and those withdrawals will constitute taxable income. The taxpayer may or may not actually pay tax on that income. That is derived from the savings having been deferred from taxation in the first place.

I don't know why people need to assert this "ownership" thing when tax law explains everything that needs to be known. It is certainly not necessary for the government to assert a right of ownership over tax deferred savings to have authority to tax the income whether when it is earned or later. Why offer such a bizarre explanation for a simple thing?
That's simple; people are not asserting a literal ownership of the account by the government. Rather, it is a metaphor or perhaps figure of speech meant to illuminate the situation prescribed out by tax law.

Obviously, if you have no other taxable income and your RMDs are low enough you may pay no tax at all during drawdown. These corner cases don't hurt the utility granted by the metaphor.
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Uncle Pennybags
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Re: Is my IRA really an IOU to the IRS??

Post by Uncle Pennybags » Tue Aug 02, 2016 4:07 pm

dbr wrote:Governments certainly do not own part of anyone's retirement accounts. If you think that is true I would like to see where that ownership is accounted for in the assets of the Federal Government or of a state government.
They own it in the same way a bank owns a house it holds the mortgagee on. They have a lean and some control of the property.

To the OP; tax planning is difficult from year to year let alone decades down the road.

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Artsdoctor
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Re: Is my IRA really an IOU to the IRS??

Post by Artsdoctor » Tue Aug 02, 2016 4:12 pm

DBR,

Geez: There were quotation marks in the "co-owned" phrase because it was really meant colloquially; no one would really think the government owned your retirement account. I should have put an emoticon after the phrase. All that said, it is always surprising to me how indignant people can get when they find out they owe income tax on their retirement savings, so clearly the message must not be getting out to everyone.

And while there are some people who will not pay personal income tax on income, this is a small percentage of the population, certainly on this board.

The Wizard
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Re: Is my IRA really an IOU to the IRS??

Post by The Wizard » Tue Aug 02, 2016 4:19 pm

I've started embracing bsteiner's recommended approach of using "extra" income in early retirement to prepay taxes on tax deferred funds (tIRA, 401k, 403b).

Personal example.
I've begun receiving ~$1000 a month in divorced spouse SS benefits this year at age 66.
This $$ is not Earned Income and thus cannot be contributed to a Roth IRA, assuming no other earned income.

However, to the extent that $12,000 per year is Extra Income (it sort of is), I can use the residual portion after tax (say $9000) to pay taxes on Roth conversions.

It's painful and somewhat impractical to do large Roth conversions after FRA (can you say IRMAA?), but I'm going in that general direction...
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Re: Is my IRA really an IOU to the IRS??

Post by JW-Retired » Tue Aug 02, 2016 4:29 pm

slipp1229 wrote: I was wondering if there is anything that could be done now (pre-retirement) with my sizable Roth and Regular IRA's to lessen the tax burden when I finally start cashing them in many retired years down the road? As often stated in this forum, I plan on using my non-qualified (taxable) retirement savings first and moving to my deferred and tax sheltered portfolios much later in retirement... Hopefully, not before MRD at age 70.5. Anything to be done now or in the near future to lessen tax impact?
There is no tax burden on Roth withdrawals. Also no MRDs.

All that can be done to lessen the tax deferred account impact is to manage the tax bracket at which you take tax deferred withdrawals. If you are expecting to be pushed into a high tax bracket once MRDs start, many of us who have that problem have done IRA to Roth conversions at a lower bracket prior to age 70.5 to ultimately reduce the MRD amount. This requires you to retire early and live on taxable savings first to keep your taxable income low enough to have space for such Roth conversions. Delay SS as long as possible to also keep the tax bracket low.

If by "pre-retirement" you mean when you are still working and earning a hefty income, that probably won't let you do very much.
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njboater74
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Re: Is my IRA really an IOU to the IRS??

Post by njboater74 » Tue Aug 02, 2016 4:30 pm

slipp1229 wrote:A quick Retirement Planning question to the Boglehead community:
As I approach early retirement at age 59 in 6 months, I was wondering if there is anything that could be done now (pre-retirement) with my sizeable Roth and Regular IRA's to lessen the tax burden when I finally start cashing them in many retired years down the road? As often stated in this forum, I plan on using my non-qualified (taxable) retirement savings first and moving to my deferred and tax sheltered portfolios much later in retirement... Hopefully, not before MRD at age 70.5. Anything to be done now or in the near future to lessen tax impact? :shock:
Thanks in advance for any advice!
You don't need to do anything with your Roth IRA, as that will never be taxed.

For your Traditional IRA, you can familiarize yourself with the tax code, and use the progressive tax rates to your advantage. For instance, you can first take distributions from your Traditional IRA up until the amount where your taxable income would still remain in the 15% bracket or lower. This way, a portion of it is taxed at 0%, a portion taxed at 10%, and a portion taxed at 15%. Your Traditional IRA is going to be taxed at some point, this will help ensure it's taxed at the lower rates.

Be careful if you take out from taxable as well, as the earnings will increase your taxable income, and if it takes your total taxable income into the 25% bracket, then you'll be subject to LTCG tax rate of 15%. You can take out a combination of taxable and traditional until you reach just below the 25% bracket, then take out from Roth.

Exactly the right combination of Traditional/Roth/Taxable to take out depends on how much you need to draw every year, and any other income sources you have. As a ballpark, how much do you expect to draw per year for the first few years?
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead

dbr
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Re: Is my IRA really an IOU to the IRS??

Post by dbr » Tue Aug 02, 2016 4:30 pm

Artsdoctor wrote:DBR,

Geez: There were quotation marks in the "co-owned" phrase because it was really meant colloquially; no one would really think the government owned your retirement account.
On the contrary there are writings in many places where people apparently seriously assert that the tax that will be due on withdrawals from tax deferred plans is because the government owns part of one's assets and is taking their share.

But the real point is that I suggest it is better to avoid to making even colloquial statements about situations that distort and complicate what is a simple situation in the first place.

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Re: Is my IRA really an IOU to the IRS??

Post by dbr » Tue Aug 02, 2016 4:47 pm

Uncle Pennybags wrote:
dbr wrote:Governments certainly do not own part of anyone's retirement accounts. If you think that is true I would like to see where that ownership is accounted for in the assets of the Federal Government or of a state government.
They own it in the same way a bank owns a house it holds the mortgagee on. They have a lean and some control of the property.

To the OP; tax planning is difficult from year to year let alone decades down the road.
Granting the idea is similar that is hardly the same as stating point blank that the IRS owns part of one's tax deferred account. Anyway, the point is why state something in such a distorted manner when there is enough complication simply computing one's future income tax expenses without confounding the whole thing with an artificial device about assets. It is another example of converting cash flow to assets in order to extract cash flow.

Do people really need that to understand that 401K withdrawals are taxable income on which some yet to be computed tax will be due? Apparently there are people who don't completely get the idea of tax deferred saving. It is totally unnecessary to assert an ownership power of the government over these assets to explain and understand the power to tax income, so why do it. Is someone doubting that governments have the power to tax?

If this were property tax no one would assert that no one owns property because counties assess property tax indefinitely against the value of property, possibly accumulating eventually to many times the value of the property. I also don't think the IRS can seize the entirety of an IRA for taxes due nor have I ever heard of government exercising power of eminent domain against an IRA. Both can apply to property but we don't often read or hear that the government owns a part of your home, farm, lot, etc.

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Re: Is my IRA really an IOU to the IRS??

Post by The Wizard » Tue Aug 02, 2016 5:00 pm

This is a rather annoying topic.
YES, the IRS has a finger in the pie as regards taxes that will be due on tax deferred accounts down the road.
But for small IRAs, $50,000 or so, taxes could be 10% or less, depending on the entire picture...
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Re: Is my IRA really an IOU to the IRS??

Post by SGM » Tue Aug 02, 2016 5:15 pm

A traditional IRA and 401k will have taxes due at age 70 1/2. However, there are ways to minimize the tax hit. Although I could not convert to Roth IRAs until 2010 I maximized our tIRAs and 401ks for many years. Conversions after 2010 were a wash at the time of conversion looking at pre and post tax rates and paying taxes out of a taxable account. However, I have enjoyed having fewer taxable dividends and capital gains and more never-to-be taxed gains in the Roth since the conversions. It was a terrific move for me now that I am paying less taxes in retirement than I would have (rate is essentially the same). It is no longer a wash and the longer the principal stays in a Roth the greater the advantage grows for the conversion. It also lowers my Medicare premiums going forward.

I have thoroughly studied the implications of the Roth conversions and would need to write a book to cover all the nuance so I am not going to try. Happy investing all. :beer

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Re: Is my IRA really an IOU to the IRS??

Post by MathWizard » Tue Aug 02, 2016 5:24 pm

If you're married, and have minimal taxable earning from your taxable account,
convert $20K from your TIRA to ROTH each year. The Stand. Deduction and 2 personal exemptions
would mean that you would owe no tax on that.

You might even want to fill up the 10% or 15% tax bracket depending on what your
expected tax bracket will be after age 70.5 .

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Re: Is my IRA really an IOU to the IRS??

Post by lemonPepper » Tue Aug 02, 2016 5:57 pm

slipp1229 wrote:A quick Retirement Planning question to the Boglehead community:
As I approach early retirement at age 59 in 6 months, I was wondering if there is anything that could be done now (pre-retirement) with my sizeable Roth and Regular IRA's to lessen the tax burden when I finally start cashing them in many retired years down the road? As often stated in this forum, I plan on using my non-qualified (taxable) retirement savings first and moving to my deferred and tax sheltered portfolios much later in retirement... Hopefully, not before MRD at age 70.5. Anything to be done now or in the near future to lessen tax impact? :shock:
Thanks in advance for any advice!
I read this book on tax planning and I thought the advice was pretty solid. See if you can borrow it from the library.

https://www.amazon.com/Retire-Secure-Gu ... nav-subnav

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Re: Is my IRA really an IOU to the IRS??

Post by eddot98 » Tue Aug 02, 2016 6:54 pm

One thing to keep in mind if you are married is how the tax rates change from when you are married filing jointly and when one of you passes on and the survivor ends up filing as a single. In our case our pension and social security fill up the under 25% income now and that income won't change too much when one of us passes and that results in the marginal rate going up from 25% to 28% on any tIRA and 457b withdrawals. Not the end of the world, but when the income was deferred, the tax on that income would have been 25%. Rather than converting tax deferred accounts to Roth's, we are trying to withdraw to the top of the 25% bracket and investing those funds in taxable accounts.

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Re: Is my IRA really an IOU to the IRS??

Post by Swimmer » Tue Aug 02, 2016 7:30 pm

eddot98 wrote:One thing to keep in mind if you are married is how the tax rates change from when you are married filing jointly and when one of you passes on and the survivor ends up filing as a single. In our case our pension and social security fill up the under 25% income now and that income won't change too much when one of us passes and that results in the marginal rate going up from 25% to 28% on any tIRA and 457b withdrawals. Not the end of the world, but when the income was deferred, the tax on that income would have been 25%. Rather than converting tax deferred accounts to Roth's, we are trying to withdraw to the top of the 25% bracket and investing those funds in taxable accounts.
I'm struggling to understand the rationale for your last sentence. Why would you want to move this money into taxable as opposed to Roth when you're taxed at the same rate? I'm missing something. :confused

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Re: Is my IRA really an IOU to the IRS??

Post by njboater74 » Tue Aug 02, 2016 8:00 pm

Swimmer wrote:
eddot98 wrote:One thing to keep in mind if you are married is how the tax rates change from when you are married filing jointly and when one of you passes on and the survivor ends up filing as a single. In our case our pension and social security fill up the under 25% income now and that income won't change too much when one of us passes and that results in the marginal rate going up from 25% to 28% on any tIRA and 457b withdrawals. Not the end of the world, but when the income was deferred, the tax on that income would have been 25%. Rather than converting tax deferred accounts to Roth's, we are trying to withdraw to the top of the 25% bracket and investing those funds in taxable accounts.
I'm struggling to understand the rationale for your last sentence. Why would you want to move this money into taxable as opposed to Roth when you're taxed at the same rate? I'm missing something. :confused
I was about to ask the same thing. I understand why your RMD's would have to go into taxable, but you could just roll the rest of your distributions into a Roth rather than a taxable.
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Re: Is my IRA really an IOU to the IRS??

Post by Phineas J. Whoopee » Tue Aug 02, 2016 8:18 pm

No, it is not, although part of the financial press incorrectly, and I suspect knowingly, even intentionally, falsely claims it is.

Let's go through the standard analysis of Traditional vs. Roth. We'll keep everything else equal. Of course in real life all else does not consistently remain equal, but the question is about Traditional vs. Roth, so we'll take exactly the same situation and apply both Traditional and Roth to it, in order to isolate and examine the end result.

Let's imagine you pay 25% in income taxes, not your top marginal rate, but overall, to keep all else equal. For the same reason, let's suppose one year you can devote $4,000 in gross, not take-home, income to an IRA of either type.

For the Traditional IRA, you would defer income tax and put the whole $4,000 in, and invest it in some vehicle or other.

For the Roth IRA, you would pay income tax up front and put the remaining $3,000 in, and invest it in the very same vehicle.

Some years later you're ready to take a distribution, and the vehicle in question has doubled.

From the Traditional IRA you distribute $8,000, pay 25% in income tax, and net $6,000 of after-tax spendable money.

From the Roth IRA you distribute $6,000, pay no income tax, and net $6,000 of after-tax spendable money.

They're exactly the same. Therefore, no, a Traditional IRA is not really an IOU to the US government (taxes are enacted by congress, which created the IRS to administer tax law so our congressional representatives don't have to take care of it for their districts individually).

In real life not all things are equal, but that means the decision involves your top marginal tax bracket today (out of which a tax-deferred Traditional IRA contribution comes) vs. your effective tax rate later (because Traditional IRA withdrawals combined with any other taxable income streams fill in your brackets from the bottom). It's not a universal. It's dependent on your own personal situation, the future part of which is not wholly known.

The answer to your question is no.

PJW

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Re: Is my IRA really an IOU to the IRS??

Post by SGM » Tue Aug 02, 2016 9:09 pm

If you have to lower the amount in a Roth because you have to be taxes out of the taxable account that might otherwise have gone into a tIRA then the advisability of a Roth is questionable.

If you have the money you put for example $4k in a tIRA and pay the taxes out of $1k taxable when you convert. Then if you remain in the same 25% bracket you have $4k in a Roth and zero in taxable when you convert.

Then years later when the Roth or the tIRA and taxable doubles you have $8k tax free from the Roth vs. $8k from the tIRA and $2k from taxable that goes to 0 to pay taxes due on withdrawal . Note you will also have been paying taxes on dividends from taxable and LT capital gains on any increase in value of taxable. So your would have to find whatever you lost from taxable to pay ongoing taxes and capital gains to pay the taxes due when cashing in the tIRA. So instead of getting $8k from traditional you will have to find an additional $400 $200 if you owe the 20% LT cap gains. You would possibly losing a few bucks a year to dividend tax in taxable.

Where the Roth conversion is more valuable is if you have larger tax advantaged and taxable accounts. Capital gains could mount up on the taxable account and dividend taxes could be significant. The Roth conversion really becomes more valuable if your RMDs are high enough to increase your tax bracket, Medicare premiums and possibly taxes on SS.

Anyway that is how I look at it for people in the 25% bracket. For me it is helpful to lower my taxable account at the time of conversion and allow the Roth to grow tax free for a long time. I am done. Thanks for reading.
Last edited by SGM on Wed Aug 03, 2016 3:09 am, edited 1 time in total.

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Re: Is my IRA really an IOU to the IRS??

Post by heyyou » Tue Aug 02, 2016 11:37 pm

At the top of the 15% tax bracket, including the deduction and exemption, for Married Filing Jointly, the tax is 10367.50 on 96000 of total income, 10.8% effective tax rate. Note that each tIRA/401k contribution was removed from the very top of the worker's income for that year, so the money saved would have been taxed at the highest marginal rate for that work year. My opinion is that 11% tax is not a terrible rate to pay later after delaying the higher tax for 20-40 years until I am in a lower tax bracket.

The first RMD is 3.7% of the recent tIRA balance. On a million dollar tIRA that is $37,000 which could be taxed at 10.8% so the tax would be $4000. If a retiree only has 96000 annual income including the RMD, $4000 is near 4% of his income for that year. I wish that I was an heir to a giant tIRA balance, since I'm willing to pay the taxes due on RMDs from it.

The alternative is for the worker to not ever contribute to tIRA or 401k to avoid future taxes by immediately having to pay the tax at his top marginal rate on that last amount of every paycheck. The worker who wanted the tax deductions, knowingly made the TAX DEFERRED contributions.

A retiree does not have to spend the RMD, he could just invest the remaining 89.2% of it in his taxable account, if he doesn't need the income. One of the portfolio spending methods is to withdraw the RMD % from every part of the portfolio for each year of retirement, with the modification of also spending interest and dividends (not cap gains), to boost income during the early years of retirement.

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Re: Is my IRA really an IOU to the IRS??

Post by celia » Wed Aug 03, 2016 2:01 am

slipp1229 wrote:As often stated in this forum, I plan on using my non-qualified (taxable) retirement savings first and moving to my deferred and tax sheltered portfolios much later in retirement... Hopefully, not before MRD at age 70.5. Anything to be done now or in the near future to lessen tax impact? :shock:
Thanks in advance for any advice!
Slipp, Have you estimated your income taxes during your "early retirement" years and after you reach 70.5? I strongly suggest you do that now. Depending on your situation, you could find yourself in the same position as many Bogleheads who decide it is better to convert as much as they can during early retirement while living off of taxable funds and using taxable funds to pay the taxes on the conversion. Some of these people find that their tax rate will be higher after age 70.5 because they have larger RMDs (if they didn't convert earlier), Social Security, and other income.

It has not yet been mentioned that many Bogleheads plan to start SS at 70 to not only max out the monthly benefit, but also to give themselves time to convert. With small SS benefits and no other income, SS is not taxed and the taxpayer may not even need to file a tax return. But as taxable income and Social Security increase, not only does SS become taxable (up to 85% of it), but formerly tax-free qualified dividends and LTC gains also become taxable. To minimize this impact, many of us try to minimize or eliminate RMDs by converting during the "early retirement" years.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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slipp1229
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Re: Is my IRA really an IOU to the IRS??

Post by slipp1229 » Wed Aug 03, 2016 6:35 am

Wow... I'm somewhat overwhelmed by the array of answers! Thanks! :D

My situation going into Retirement: Status Married (to retire in 6 months at 59) no debt
Total savings: $1.8MM
401K: $1.1MM
tIRA: $.2MM
Roth: $.1MM
Taxable & Cash: $.4MM
Retirement Income
Pension: $30,000/yr
SS: $24,000/yr (assuming if taken at earliest age 63)
Calculated annual income need in retirement: $80,000

From the above readings I have gleaned the goal is to plan my deferred withdrawal strategy around staying below the 25% tax bracket by not adding to my annual income of $54,000 (pension+SS). Not sure if this is possible with an $80,000/yr income stream needed?

Slipp

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Re: Is my IRA really an IOU to the IRS??

Post by triceratop » Wed Aug 03, 2016 8:00 am

Phineas J. Whoopee wrote:No, it is not, although part of the financial press incorrectly, and I suspect knowingly, even intentionally, falsely claims it is.

Let's go through the standard analysis of Traditional vs. Roth. We'll keep everything else equal. Of course in real life all else does not consistently remain equal, but the question is about Traditional vs. Roth, so we'll take exactly the same situation and apply both Traditional and Roth to it, in order to isolate and examine the end result.

Let's imagine you pay 25% in income taxes, not your top marginal rate, but overall, to keep all else equal. For the same reason, let's suppose one year you can devote $4,000 in gross, not take-home, income to an IRA of either type.

For the Traditional IRA, you would defer income tax and put the whole $4,000 in, and invest it in some vehicle or other.

For the Roth IRA, you would pay income tax up front and put the remaining $3,000 in, and invest it in the very same vehicle.

Some years later you're ready to take a distribution, and the vehicle in question has doubled.

From the Traditional IRA you distribute $8,000, pay 25% in income tax, and net $6,000 of after-tax spendable money.

From the Roth IRA you distribute $6,000, pay no income tax, and net $6,000 of after-tax spendable money.

They're exactly the same. Therefore, no, a Traditional IRA is not really an IOU to the US government (taxes are enacted by congress, which created the IRS to administer tax law so our congressional representatives don't have to take care of it for their districts individually).

In real life not all things are equal, but that means the decision involves your top marginal tax bracket today (out of which a tax-deferred Traditional IRA contribution comes) vs. your effective tax rate later (because Traditional IRA withdrawals combined with any other taxable income streams fill in your brackets from the bottom). It's not a universal. It's dependent on your own personal situation, the future part of which is not wholly known.

The answer to your question is no.

PJW
(emphasis added)

Two points. One, all tax analysis is marginal so it makes no difference that you pay 25% in income taxes: what matters is your marginal bracket. In this situation that makes no difference. Two, I fail to see how your scenario resulting in the same after-tax sum proves the IRS doesn't "own" (which is always a figurative own) part of your traditional IRA. The people who see part of the tIRA as "belonging" to the IRS would say that that $2,000 which goes to the government later is the I.O.U. payment.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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njboater74
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Re: Is my IRA really an IOU to the IRS??

Post by njboater74 » Wed Aug 03, 2016 8:09 am

slipp1229 wrote:Wow... I'm somewhat overwhelmed by the array of answers! Thanks! :D

My situation going into Retirement: Status Married (to retire in 6 months at 59) no debt
Total savings: $1.8MM
401K: $1.1MM
tIRA: $.2MM
Roth: $.1MM
Taxable & Cash: $.4MM
Retirement Income
Pension: $30,000/yr
SS: $24,000/yr (assuming if taken at earliest age 63)
Calculated annual income need in retirement: $80,000

From the above readings I have gleaned the goal is to plan my deferred withdrawal strategy around staying below the 25% tax bracket by not adding to my annual income of $54,000 (pension+SS). Not sure if this is possible with an $80,000/yr income stream needed?

Slipp
You're retiring at 59, is your spouse also retired? Is there any income from your spouse before Social Security? When does your pension start?

It should still be possible. I'm presuming you need 80k after taxes, which means you'll need to take enough distributions to cover the tax.

As heyyou mentioned, the tax on 95,900 total income is 10367.50 (even less if you have itemized deductions). Of the 95,900, you set aside 80k for living expenses, and 10367.50 for your tax bill. That leaves you with about 5500 that you can rollover into a Roth IRA. You can rollover as much as you want, but any more than that you'll be rolling over at the 25% rate.

Is the SS of 24,000/yr just for you, or for both you and your spouse? Social Security makes things tricker, because once you're collecting, IRA/401k distributions not only have the effect of being taxable themselves, but also making more of your SS income taxable. You don't really have much of a choice though, since you need 80k. You could possibly postpone your SS benefits, and give yourself more time to live off of and rollover your 401k at the lower tax rates, and get the higher SS benefit when you do start to collect.
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead

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slipp1229
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Re: Is my IRA really an IOU to the IRS??

Post by slipp1229 » Wed Aug 03, 2016 8:46 am

- Spouse never employed
- All $'s shown are my and her combined assets.
- Pension starts April 2017 (month after I retire)

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njboater74
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Re: Is my IRA really an IOU to the IRS??

Post by njboater74 » Wed Aug 03, 2016 9:05 am

Maybe we should change the subject of this thread. "Is my IRA really an IOU to the IRS" is distracting and somewhat beside the point.

The two main questions I see here, given your situation, are:
1. When is the best year to begin SS benefits?
2. What is the most tax-efficient way to draw from accounts during retirement?

There are a lot of smart folks on this forum who are in retirement and have dealt with situations very similar to yours. The fact that they aren't weighing in on this I think is due to the unfortunate subject line.

Might I suggest "Which accounts (Traditional/Roth/Taxable) to draw from first during retirement"
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead

dbr
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Re: Is my IRA really an IOU to the IRS??

Post by dbr » Wed Aug 03, 2016 9:55 am

There is a plethora of articles that can be found by Google generally on this subject: https://www.google.com/#q=how+to+withdr ... fficiently and also within the forum: https://www.google.com/search?sitesearc ... fficiently

Within these articles you will find very respectable people who are enamored of the "government owns/iou to the irs metaphor" and others who navigate the subject without needing that.

In any case there are definitely appropriate strategies for how to gain best tax advantage.

jjface
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Re: Is my IRA really an IOU to the IRS??

Post by jjface » Wed Aug 03, 2016 9:55 am

Being an IOU if you want to call it that isn't a bad thing. Would you prefer to pay for the taxes now?

Theoretical
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Re: Is my IRA really an IOU to the IRS??

Post by Theoretical » Wed Aug 03, 2016 1:38 pm

Well, there is the part that would be subject to taxes which is an IOU of sorts, but the real way you can make it an IOU to the IRS is by screwing up your beneficiary designations, failing to make proper RMDs, and taking inherited IRAs as a lump sum. That's a truly great way to benefit the IRS.

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Re: Is my IRA really an IOU to the IRS??

Post by Morik » Wed Aug 03, 2016 2:04 pm

Regarding the semantics, I don't really care. Whether you consider it as partially "owned" by the IRS or not, the fact remains that you will (likely, unless you are in a very low income bracket) pay taxes on withdrawals from a tIRA.

The real question is: so what do you do with that information?


Personally I apply weights to all of my retirement accounts, adjusting them down to my best estimate of after-tax value.
Why do I do this? Because if you count money that will disappear into the tax hole as part of your allocation, your allocation is actually different than what you think.

E.g., lets say you have $10 each in a tIRA and Roth IRA, and want a 50/50 stock/bond split.
Lets say your marginal rate is 25%.

Your actual allocation is different if you do:

Allocation A:
tIRA: $10k bonds
Roth IRA: $10k stock

vs

Allocation B:
tIRA: $10k stock
Roth IRA: $10k bonds

Why? Lets look at a few scenarios.

Scenario 1:
- Stocks go up 50%, bonds up 10%, you are ready to withdraw.

Allocation A:
$11k in bonds in tIRA,
$15k in stock in Roth IRA

After withdrawal:
$11k*(1-0.25) + $15k = $23,250

Allocation B:
$15k in stock in tIRA
$11k in bonds in Roth IRA

After withdrawal:
$15k*(1-0.25) + $11k = $22,500

Where did the other $1,250 go? Well, your tIRA had more growth this time instead of your Roth IRA, and you have to pay taxes on that higher growth.

Scenario 2:
- Stocks go down 50%, bonds up 10%


Allocation A:
$11k in bonds in tIRA,
$5k in stock in Roth IRA

After withdrawal:
$11k*(1-0.25) + $5k = $13,250

Allocation B:
$5k in stock in tIRA
$11k in bonds in Roth IRA

After withdrawal:
$5k*(1-0.25) + $11k = $14,750

This time allocation B comes out ahead by $1,500. Why? Due to whether the loss is in the account where you'll pay taxes on withdrawals or not.


What to do? If you weight your money by after-tax amount, then you get the same result regardless of which account holds what.

Allocation C:
$10k in tIRA, weighted down to $7,500 after taxes
$10k in Roth IRA.

So total: $17,500 (weighted after-tax money available)

50/50 split:
$7,500 tIRA bonds (invest all $10k in it, but only count it as $7,500)
$1,250 Roth IRA bonds
$8,750 Roth IRA stocks

You can do tIRA stocks instead.
If you do out the scenarios above, you will come out the same regardless of which account holds what.


(Note that it likely isn't worth the extra work to a lot of people; I do this, but it doesn't have a huge affect on my allocations. You can calculate your weighted AA and your unweighted AA--mine aren't that different.)

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Re: Is my IRA really an IOU to the IRS??

Post by artthomp » Wed Aug 03, 2016 4:45 pm

I don't think it's worked much like an IOU for me.

I have been taking IRS Required Distributions since 2010 (corrected). The results are interesting.

The increase in the traditional IRA from 2010 to 2016 is presently +7%

The highest increase in the traditional IRA was from 2010 to 2015 was +11.6%

The Required Distributions total +30.7% of the total value of the 2010 traditional IRA.

We have found it convenient to withhold our entire federal and state taxes from the distribution since 2014. We also spend some of the excess on a month long vacation condo in Jupiter Florida for the St. Louis Cardinals Spring Training. Finally, we are investing any leftover in taxable Exchange Traded Funds and Mutual Funds from Vanguard increasing the overall portfolio value.
Last edited by artthomp on Thu Aug 04, 2016 7:59 am, edited 1 time in total.
Art

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Re: Is my IRA really an IOU to the IRS??

Post by The Wizard » Wed Aug 03, 2016 5:20 pm

artthomp wrote:I don't think it's worked much like an IOU for me.

I have been taking IRS Required Distributions since 1970. The results are interesting...
1970??
Wowza!
Must've been an INHERITED tIRA since you'd be 116 now if this was from your own contributions.
Anyhow, Three Cheers for Longevity...
Attempted new signature...

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Re: Is my IRA really an IOU to the IRS??

Post by Phineas J. Whoopee » Wed Aug 03, 2016 7:09 pm

triceratop wrote:...
Two points. One, all tax analysis is marginal so it makes no difference that you pay 25% in income taxes: what matters is your marginal bracket. In this situation that makes no difference. Two, I fail to see how your scenario resulting in the same after-tax sum proves the IRS doesn't "own" (which is always a figurative own) part of your traditional IRA. The people who see part of the tIRA as "belonging" to the IRS would say that that $2,000 which goes to the government later is the I.O.U. payment.
The original question as written, since edited to remove the Roth reference, was about Roth vs. Traditional IRA tax treatment, even if it wasn't what OP intended to ask. Morik wrote about it upthread.

I agree proof is that which convinces, and some posters and readers may not be convinced by math which shows the end result to be identical. I won't try to speak for them or for you.

Any effective tax rate, including 50%, 5%, -24%, and 5,000,000% works the same, in terms of identical results. You're right about that and I didn't contradict it. One example working doesn't imply other examples won't. If that were the case, it would be a poor technique to use an example to illustrate the point.

With respect to marginal brackets, I addressed them directly in my post. The analysis is explicitly for the purpose of examining only the Roth vs. Traditional question; that is to say it keeps all other variables equal. If my second and tenth paragraphs were unclear, tell me how and I'll try to do better. If they're wrong, please tell me in what way.

I gave the standard explanation. It's in the wiki. If the wiki is wrong let's change it, but I'm not saying I'm right because of what it says. I'm saying I'm right because of arithmetic.

If my arithmetic is wrong please point out where, and I'll thank you for the correction and not use it anymore.

Still friends?

PJW

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Re: Is my IRA really an IOU to the IRS??

Post by eddot98 » Wed Aug 03, 2016 10:48 pm

Swimmer wrote:
eddot98 wrote:One thing to keep in mind if you are married is how the tax rates change from when you are married filing jointly and when one of you passes on and the survivor ends up filing as a single. In our case our pension and social security fill up the under 25% income now and that income won't change too much when one of us passes and that results in the marginal rate going up from 25% to 28% on any tIRA and 457b withdrawals. Not the end of the world, but when the income was deferred, the tax on that income would have been 25%. Rather than converting tax deferred accounts to Roth's, we are trying to withdraw to the top of the 25% bracket and investing those funds in taxable accounts.
I'm struggling to understand the rationale for your last sentence. Why would you want to move this money into taxable as opposed to Roth when you're taxed at the same rate? I'm missing something. :confused
I arrived at using this strategy by a lot of research and with assistance from folks on this forum. My wife and I are in a different situation than most, we are childless and have no need to leave anything to anybody. That said, we are in the enviable position of having a good secure pension that has a joint full survivor allowance and I paid very close to the maximum into social security for more than 35 years. Additionally we are holding about $1M in retirement accounts, with almost 30% of that in Roth accounts already. As Bustoff said in another one of my threads:
"Why pay all those conversion taxes in a short 6 years (I am 65 now) as opposed to stretching it out over 20 years? Worse god forbid, a premature death makes those upfront tax payments all the more painful."

So, we are withdrawing what we can from tax deferred accounts up to the top of the 25% bracket to get as much of the money out as we can that will be taxed at 25% before only one of us is left and their marginal rate will be 28%.

Maybe I'm daft, and if someone can tell me why I am, then we can adjust our strategy. Thanks for commenting.

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Re: Is my IRA really an IOU to the IRS??

Post by njboater74 » Wed Aug 03, 2016 11:10 pm

eddot98 wrote:
Swimmer wrote:
eddot98 wrote:One thing to keep in mind if you are married is how the tax rates change from when you are married filing jointly and when one of you passes on and the survivor ends up filing as a single. In our case our pension and social security fill up the under 25% income now and that income won't change too much when one of us passes and that results in the marginal rate going up from 25% to 28% on any tIRA and 457b withdrawals. Not the end of the world, but when the income was deferred, the tax on that income would have been 25%. Rather than converting tax deferred accounts to Roth's, we are trying to withdraw to the top of the 25% bracket and investing those funds in taxable accounts.
I'm struggling to understand the rationale for your last sentence. Why would you want to move this money into taxable as opposed to Roth when you're taxed at the same rate? I'm missing something. :confused
I arrived at using this strategy by a lot of research and with assistance from folks on this forum. My wife and I are in a different situation than most, we are childless and have no need to leave anything to anybody. That said, we are in the enviable position of having a good secure pension that has a joint full survivor allowance and I paid very close to the maximum into social security for more than 35 years. Additionally we are holding about $1M in retirement accounts, with almost 30% of that in Roth accounts already. As Bustoff said in another one of my threads:
"Why pay all those conversion taxes in a short 6 years (I am 65 now) as opposed to stretching it out over 20 years? Worse god forbid, a premature death makes those upfront tax payments all the more painful."

So, we are withdrawing what we can from tax deferred accounts up to the top of the 25% bracket to get as much of the money out as we can that will be taxed at 25% before only one of us is left and their marginal rate will be 28%.

Maybe I'm daft, and if someone can tell me why I am, then we can adjust our strategy. Thanks for commenting.
Nothing wrong with stretching it out over 20 years. I think the confusion lies from the fact that you're paying 25% taxes on the withdrawals and putting the proceeds in taxable. You could just rollover the exact same amount into a Roth IRA, and pay the exact same taxes.
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead

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Re: Is my IRA really an IOU to the IRS??

Post by eddot98 » Thu Aug 04, 2016 12:06 am

njboater74 wrote:
eddot98 wrote:
Swimmer wrote:
eddot98 wrote:One thing to keep in mind if you are married is how the tax rates change from when you are married filing jointly and when one of you passes on and the survivor ends up filing as a single. In our case our pension and social security fill up the under 25% income now and that income won't change too much when one of us passes and that results in the marginal rate going up from 25% to 28% on any tIRA and 457b withdrawals. Not the end of the world, but when the income was deferred, the tax on that income would have been 25%. Rather than converting tax deferred accounts to Roth's, we are trying to withdraw to the top of the 25% bracket and investing those funds in taxable accounts.
I'm struggling to understand the rationale for your last sentence. Why would you want to move this money into taxable as opposed to Roth when you're taxed at the same rate? I'm missing something. :confused
I arrived at using this strategy by a lot of research and with assistance from folks on this forum. My wife and I are in a different situation than most, we are childless and have no need to leave anything to anybody. That said, we are in the enviable position of having a good secure pension that has a joint full survivor allowance and I paid very close to the maximum into social security for more than 35 years. Additionally we are holding about $1M in retirement accounts, with almost 30% of that in Roth accounts already. As Bustoff said in another one of my threads:
"Why pay all those conversion taxes in a short 6 years (I am 65 now) as opposed to stretching it out over 20 years? Worse god forbid, a premature death makes those upfront tax payments all the more painful."

So, we are withdrawing what we can from tax deferred accounts up to the top of the 25% bracket to get as much of the money out as we can that will be taxed at 25% before only one of us is left and their marginal rate will be 28%.

Maybe I'm daft, and if someone can tell me why I am, then we can adjust our strategy. Thanks for commenting.
Nothing wrong with stretching it out over 20 years. I think the confusion lies from the fact that you're paying 25% taxes on the withdrawals and putting the proceeds in taxable. You could just rollover the exact same amount into a Roth IRA, and pay the exact same taxes.
But if I were to convert say $45,000 this year, we cannot withdraw it for 5 years without a 10% penalty. Then for the next year's conversion another 5 year period starts, etc., etc. How does one deal with that record keeping?
It just seems that it's so much simpler once it's in taxable. If we use a tax efficient strategy, we probably won't be giving up too much in the way of gains to get simplicity.

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Re: Is my IRA really an IOU to the IRS??

Post by Epsilon Delta » Thu Aug 04, 2016 12:35 am

eddot98 wrote: But if I were to convert say $45,000 this year, we cannot withdraw it for 5 years without a 10% penalty. Then for the next year's conversion another 5 year period starts, etc., etc. How does one deal with that record keeping?
It just seems that it's so much simpler once it's in taxable. If we use a tax efficient strategy, we probably won't be giving up too much in the way of gains to get simplicity.
Record keeping is fairly easy. I've been keeping track of this since 1997 and I just got to the back of the single sheet of paper last year.

More importantly once Roth distributions are qualified (which usually means you're over 59.5 years old and any of your Roth IRAs is over 5 years old) every thing is tax and penalty free, the tracking requirement disappears.

Worst case is you do not already have a Roth. Establish one this year then circle the later of Jan 1 2010 or your 59.5 birthday that's the longest you'll need to track anything.

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Re: Is my IRA really an IOU to the IRS??

Post by triceratop » Thu Aug 04, 2016 7:58 am

Phineas J. Whoopee wrote:
triceratop wrote:...
Two points. One, all tax analysis is marginal so it makes no difference that you pay 25% in income taxes: what matters is your marginal bracket. In this situation that makes no difference. Two, I fail to see how your scenario resulting in the same after-tax sum proves the IRS doesn't "own" (which is always a figurative own) part of your traditional IRA. The people who see part of the tIRA as "belonging" to the IRS would say that that $2,000 which goes to the government later is the I.O.U. payment.
The original question as written, since edited to remove the Roth reference, was about Roth vs. Traditional IRA tax treatment, even if it wasn't what OP intended to ask. Morik wrote about it upthread.

I agree proof is that which convinces, and some posters and readers may not be convinced by math which shows the end result to be identical. I won't try to speak for them or for you.

Any effective tax rate, including 50%, 5%, -24%, and 5,000,000% works the same, in terms of identical results. You're right about that and I didn't contradict it. One example working doesn't imply other examples won't. If that were the case, it would be a poor technique to use an example to illustrate the point.

With respect to marginal brackets, I addressed them directly in my post. The analysis is explicitly for the purpose of examining only the Roth vs. Traditional question; that is to say it keeps all other variables equal. If my second and tenth paragraphs were unclear, tell me how and I'll try to do better. If they're wrong, please tell me in what way.

I gave the standard explanation. It's in the wiki. If the wiki is wrong let's change it, but I'm not saying I'm right because of what it says. I'm saying I'm right because of arithmetic.

If my arithmetic is wrong please point out where, and I'll thank you for the correction and not use it anymore.

Still friends?

PJW
The arithmetic isn't wrong, just irrelevant. All tax analysis is done with marginal rates and is done marginally, because not doing so can lead to nonoptimal results. I think we can agree on that.

As for "some posters and readers may not be convinced by math which shows the end result to be identical": please explain how the end result being identical has anything to do with the IRS not owning part of the IRA at a rate yet to be determined. It's true empirically, and while your math correct it is entirely orthogonal to the point you are trying to make.

All your math (marginal rates aside) has been correct. I never disputed that. That doesn't mean your claims are correct.

Still friends....
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Is my IRA really an IOU to the IRS??

Post by FLC41 » Thu Aug 04, 2016 12:02 pm

This isn't exactly what you asked, OP, since it isn't a strategy that you can implement in the near future. But I thought I would mention it anyway: under current law, once you are of an age to take RMDs you may direct up to $100,000 per year from your traditional IRA to a qualified charity and have it count against your RMD for that year. I can think of many caveats - maybe you aren't charitably inclined, maybe the laws will have changed by then, maybe this wouldn't allow you to have sufficient income, etc. - but it is something to be aware of.

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Re: Is my IRA really an IOU to the IRS??

Post by Phineas J. Whoopee » Thu Aug 04, 2016 4:10 pm

Hi friend,

I'm beginning to feel as if this conversation between the two of us will have an agree-to-disagree nonresolution, but you ask me for an explanation, which I'll provide. I do not, at this time, expect you to accept the reasoning, but I want to write it anyway rather than leave your question unanswered.
triceratop wrote:...
As for "some posters and readers may not be convinced by math which shows the end result to be identical": please explain how the end result being identical has anything to do with the IRS not owning part of the IRA at a rate yet to be determined. It's true empirically, and while your math correct it is entirely orthogonal to the point you are trying to make.
...
Here's my reasoning:

The contention is not that a Roth IRA is an IOU to the government. The claim is for Traditional IRAs only.

Examined, as I did, with all else being equal, the after-tax amount in the investor's hand to spend is the same. Roth money and Traditional money both are taxed, which was the background of the original question. The difference between them is in the timing of certain outgoing cash flows, not in the end result.

The same procedure is used, for example, in double-blind studies. Some volunteers are given the medicine, and some given a harmless substance neither they nor those who administer it can distinguish from the real thing. Only one variable is changed: whether the subject received or did not receive the compound under investigation.

It's a way to examine just one element in a complex system, to see what it does, and it's how I approached the question.

I chose to test the after-tax value available to spend. All else held equal that outcome does not change. Since it didn't change the end result, I conclude a Traditional IRA's being a metaphorical IOU to the government is no more apt than a Roth IRA's being a metaphorical receipt for taxes already paid.

If we are reasoning by metaphor we're on slippery ground. I'm reasoning by math. Anybody who wants can, as you did, call the math irrelevant to the, metaphorical from the beginning, question.

That's the end of my reasoning.

I would like to repeat two links I included upthread, because they are germane to the applicability of the math, although not to the metaphor:

Traditional vs. Roth IRAs: Taxes houses the math and an acknowledgement, like the one I previously wrote, that in practice all else is not equal, and marginal rates play a important role. Without an understanding of the fundamental, underlying non-difference, I believe it is more difficult to fully grasp the specific aspects of how marginal rates apply to one's situation.

Tax-adjusted asset allocation discusses how to reflect disparate tax treatment of accounts.

PJW

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Re: Is my IRA really an IOU to the IRS??

Post by Morik » Thu Aug 04, 2016 5:40 pm

So I still don't really care about the semantics (would resolving the semantic argument one way or the other affect anyone's decision making process around IRAs? I can't see how it would.), but I figured I'd pipe in again anyway:
- You could donate your entire IRA to charity and IRS doesn't get any of it, and has no say in whether you do this or not.

So I would say to the semantic argument that metaphorically, the IRS owns a chunk of your IRA is not metaphorically accurate.

Just as I wouldn't say the IRS owns a metaphorical chunk of my gross pay. (I could donate all my income to charity and I don't think I'd pay any taxes... except maybe FICA?)

Its more like the IRS owns the imaginary gate through which you withdraw your money, and exacts a toll on it.
If you get the money out through a different gate (e.g., donating it all to charity), the IRS doesn't get in on that.

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Re: Is my IRA really an IOU to the IRS??

Post by Alan S. » Thu Aug 04, 2016 5:52 pm

A metaphor reflects a likeness or analogous description, therefore need not be identical.

In any event, those who convert to a Roth IRA or make regular Roth contributions are largely convinced that the IOU is substantially descriptive.

dbr
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Re: Is my IRA really an IOU to the IRS??

Post by dbr » Thu Aug 04, 2016 6:02 pm

Why reason by metaphor when it adds nothing and you still have to do the math? It might be better to just look at the rules for how to pay your taxes and move on -- see here: https://www.irs.gov/retirement-plans If anyone needs to be convinced it is really true they can look here: http://www.annenbergclassroom.org/page/ ... -section-8

randomguy
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Re: Is my IRA really an IOU to the IRS??

Post by randomguy » Thu Aug 04, 2016 6:10 pm

slipp1229 wrote:A quick Retirement Planning question to the Boglehead community:
As I approach early retirement at age 59 in 6 months, I was wondering if there is anything that could be done now (pre-retirement) with my sizeable Regular IRA's to lessen the tax burden when I finally start cashing them in many retired years down the road? As often stated in this forum, I plan on using my non-qualified (taxable) retirement savings first and moving to my deferred and tax sheltered portfolios much later in retirement... Hopefully, not before MRD at age 70.5. Anything to be done now or in the near future to lessen tax impact? :shock:
Thanks in advance for any advice!

Edited to remove "Roth IRA" :oops:
Obvious answer is to spend SOME of the IRA now (either by spending or ROTH conversion) and taxable latter. It tends to be more tax efficient than the either/or options in every case that I have seen. Not doing it because the name the government gives an account (taxable versus retirement) is a poor reason IMNHO. Current tax laws favor pushing LTGC into taxable and OI into tax deferred so you might as well exploit that. How exactly this works out depends a lot on income (people in the 15% bracket have different issues than people making 250k+), flexibility (how much you have in an IRA/taxable, cost basis in taxable), future SS/pensions, ACA, future guesses (moving from CA to FL in a couple years or vice versa) and religious beliefs (i.e would you rather have 50k after paying 25k in taxes or have 30k after paying 10k in taxes. A lot of people seem to prefer the second case as it minimizes their taxes.). Take your exact situation, run a couple of different cases and see which one you think is better.

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Re: Is my IRA really an IOU to the IRS??

Post by Phineas J. Whoopee » Fri Aug 05, 2016 11:03 pm

Alan S. wrote:A metaphor reflects a likeness or analogous description, therefore need not be identical.
I hope I do not once again provoke literalists with this non-literal simile for a metaphor for a simile, nevertheless: A simile is like a metaphor. A metaphor is a simile.
Alan S. wrote:In any event, those who convert to a Roth IRA or make regular Roth contributions are largely convinced that the IOU is substantially descriptive.
Shall we conduct a referendum to determine whether metaphorical reasoning defeats mathematical?

PJW

SGM
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Re: Is my IRA really an IOU to the IRS??

Post by SGM » Sat Aug 06, 2016 7:21 am

I have always been a pay taxes later type. This changed when I looked at future RMDs. It is to my advantage to have paid taxes earlier in semi-retirement and retirement before 70 instead of paying taxes on RMDs after age 70 1/2. I am still surprised at how many don't look at the advantage of decreasing the drag on returns from one's taxable account by paying taxes out of taxable accounts instead of the tIRA.

My relative who is a financial advisor pooh-poohed conversions as only helping one's heirs. That is not my view at all. He also pooh-poohed delaying SS by saying you never know when you are going to die. He is not aware of the value of delaying SS as a cheaper insurance against long life. I am well insured despite not dealing with an insurance company.

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