What counts as income? (planning retirement withdrawal strategy)

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JustinR
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What counts as income? (planning retirement withdrawal strategy)

Post by JustinR » Sun Aug 27, 2017 11:50 pm

It's confusing which things count as income.

Some things are not counted as income at all. Other things are subject to 0% tax...but count as income (such as capital gains in lower tax brackets).

Here's a list of different types of withdrawals, please tell me if it counts as income or not, and if there are any special tax rules (such as lower long term capital gain taxes):

  • Taxable principal:
  • Taxable earnings:
  • Roth IRA principal:
  • Roth IRA earnings:
  • Traditional IRA:
  • Traditional IRA Required Minimum Distributions:
  • 401K:
  • 401K Required Minimum Distributions:
  • HSA withdrawals for medical purposes:
  • HSA withdrawals for non-medical purposes (after 65):
  • Social Security:

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FiveK
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by FiveK » Mon Aug 28, 2017 12:27 am

JustinR wrote:
Sun Aug 27, 2017 11:50 pm
  • Taxable principal: No
  • Taxable earnings: Yes
  • Roth IRA principal: Usually not, unless it is from a tIRA conversion done less than 5 years ago.
  • Roth IRA earnings: Depends on age
  • Traditional IRA: Yes
  • Traditional IRA Required Minimum Distributions: Yes
  • 401K: Yes
  • 401K Required Minimum Distributions: Yes
  • HSA withdrawals for medical purposes: No
  • HSA withdrawals for non-medical purposes (after 65): Yes
  • Social Security: Yes
Short of referring you to Publication 17, Your Federal Income Tax, any advice is subject to exceptions. The answers above will likely be correct for most situations.

Might be worth taking a copy of 2016 Form 1040 - f1040.pdf and, optionally, your tax software of choice, and running some "what if...?" calculations.

JustinR
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by JustinR » Mon Aug 28, 2017 12:34 am

FiveK wrote:
Mon Aug 28, 2017 12:27 am
JustinR wrote:
Sun Aug 27, 2017 11:50 pm
  • Taxable principal: No
  • Taxable earnings: Yes
  • Roth IRA principal: Usually not, unless it is from a tIRA conversion done less than 5 years ago.
  • Roth IRA earnings: Depends on age
  • Traditional IRA: Yes
  • Traditional IRA Required Minimum Distributions: Yes
  • 401K: Yes
  • 401K Required Minimum Distributions: Yes
  • HSA withdrawals for medical purposes: No
  • HSA withdrawals for non-medical purposes (after 65): Yes
  • Social Security: Yes
Short of referring you to Publication 17, Your Federal Income Tax, any advice is subject to exceptions. The answers above will likely be correct for most situations.

Might be worth taking a copy of 2016 Form 1040 - f1040.pdf and, optionally, your tax software of choice, and running some "what if...?" calculations.
Thank you!

"Roth IRA earnings: Depends on age"

What does this mean? Do earnings not count as income after 60?

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neurosphere
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by neurosphere » Mon Aug 28, 2017 12:45 am

JustinR wrote:
Mon Aug 28, 2017 12:34 am
"Roth IRA earnings: Depends on age"

What does this mean? Do earnings not count as income after 60?
Withdrawals of earnings in a Roth IRA are tax free if the withdrawals are "qualified". In general after age 59.5 withdrawals of earnings are tax free, yes.

Under most circumstances that don't involve withdrawals of conversions that are less than 5 years old, all withdrawals from Roth accounts at age 60+ are tax free.
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

JustinR
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by JustinR » Mon Aug 28, 2017 12:57 am

neurosphere wrote:
Mon Aug 28, 2017 12:45 am
JustinR wrote:
Mon Aug 28, 2017 12:34 am
"Roth IRA earnings: Depends on age"

What does this mean? Do earnings not count as income after 60?
Withdrawals of earnings in a Roth IRA are tax free if the withdrawals are "qualified". In general after age 59.5 withdrawals of earnings are tax free, yes.

Under most circumstances that don't involve withdrawals of conversions that are less than 5 years old, all withdrawals from Roth accounts at age 60+ are tax free.
AND they don't count as income? That's what I'm trying to figure out.

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neurosphere
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by neurosphere » Mon Aug 28, 2017 1:04 am

JustinR wrote:
Mon Aug 28, 2017 12:57 am
AND they don't count as income? That's what I'm trying to figure out.
Define "income". Are Roth withdrawals taxable income? (in general) no. Are Roth withdrawals 'income' because you can spend the money? Yes.

'Income' can have different meanings in different situations. What kind of income are you talking about?

It seems that you are comparing this to "income" from capital gains. Which is non-taxable income in certain situations, but after a certain amount, this non-taxable income can affect/increase your taxes.

So if I'm reading your question correctly, I'd say no. (Qualified) Roth withdrawals never count as 'income' in the sense that they are never subject to tax, and also would never cause other non-taxable income to then become subject to tax.

JustinR
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by JustinR » Mon Aug 28, 2017 2:08 am

neurosphere wrote:
Mon Aug 28, 2017 1:04 am
JustinR wrote:
Mon Aug 28, 2017 12:57 am
AND they don't count as income? That's what I'm trying to figure out.
Define "income". Are Roth withdrawals taxable income? (in general) no. Are Roth withdrawals 'income' because you can spend the money? Yes.

'Income' can have different meanings in different situations. What kind of income are you talking about?

It seems that you are comparing this to "income" from capital gains. Which is non-taxable income in certain situations, but after a certain amount, this non-taxable income can affect/increase your taxes.

So if I'm reading your question correctly, I'd say no. (Qualified) Roth withdrawals never count as 'income' in the sense that they are never subject to tax, and also would never cause other non-taxable income to then become subject to tax.
Income as in: does it fill up your tax brackets, pushing your marginal rate upwards even though it's only subject to 0% tax itself.

According to this, it looks like it's not:

https://www.irs.gov/publications/p590b/ ... 1000231057
You do not include in your gross income qualified distributions...
Thank you.

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celia
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by celia » Mon Aug 28, 2017 2:37 am

neurosphere wrote:
Mon Aug 28, 2017 12:45 am
JustinR wrote:
Mon Aug 28, 2017 12:34 am
"Roth IRA earnings: Depends on age"

What does this mean? Do earnings not count as income after 60?
Withdrawals of earnings in a Roth IRA are tax free if the withdrawals are "qualified". In general after age 59.5 withdrawals of earnings are tax free, yes.

Under most circumstances that don't involve withdrawals of conversions that are less than 5 years old, all withdrawals from Roth accounts at age 60+ are tax free.
To be more precise, Roth contributions and conversions can be withdrawn at any time tax-free since they were already taxed.

The earnings on Roth contributions are tax-free at withdrawal if the account owner has any ROTH that has been open at least 5 years AND the account owner is over 59.5.

The earnings on Roth conversions are tax-free at withdrawal if the conversion was done at least 5 years ago OR the account owner is over 59.5.

Understanding The Two 5-Year Rules For Roth IRA Contributions And Conversions
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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FiveK
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by FiveK » Mon Aug 28, 2017 7:36 am

celia wrote:
Mon Aug 28, 2017 2:37 am
To be more precise, Roth...conversions can be withdrawn at any time tax-free since they were already taxed.
Maybe semantics but the 10% penalty for withdrawing conversion principal prior to five years would act the same as a tax.

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neurosphere
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by neurosphere » Mon Aug 28, 2017 7:41 am

FiveK wrote:
Mon Aug 28, 2017 7:36 am
celia wrote:
Mon Aug 28, 2017 2:37 am
To be more precise, Roth...conversions can be withdrawn at any time tax-free since they were already taxed.
Maybe semantics but the 10% penalty for withdrawing conversion principal prior to five years would act the same as a tax.
Related question I've never really thought about before, and will ask here and then go look it up later (if no one beats me to it)...

How are after-tax IRA/401k --> Roth conversions (original contributions and earnings) treated with respect to penalties?

teen persuasion
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by teen persuasion » Mon Aug 28, 2017 12:54 pm

JustinR wrote:
Mon Aug 28, 2017 12:57 am
neurosphere wrote:
Mon Aug 28, 2017 12:45 am
JustinR wrote:
Mon Aug 28, 2017 12:34 am
"Roth IRA earnings: Depends on age"

What does this mean? Do earnings not count as income after 60?
Withdrawals of earnings in a Roth IRA are tax free if the withdrawals are "qualified". In general after age 59.5 withdrawals of earnings are tax free, yes.

Under most circumstances that don't involve withdrawals of conversions that are less than 5 years old, all withdrawals from Roth accounts at age 60+ are tax free.
AND they don't count as income? That's what I'm trying to figure out.
Depends on where and why you are reporting your income. Roth withdrawals ARE treated as available income on the FAFSA. They are reported as nontaxable income and added to your AGI. They would also be included as income for Free/reduced lunch applications.

JustinR
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by JustinR » Mon Aug 28, 2017 4:20 pm

teen persuasion wrote:
Mon Aug 28, 2017 12:54 pm
JustinR wrote:
Mon Aug 28, 2017 12:57 am
neurosphere wrote:
Mon Aug 28, 2017 12:45 am
JustinR wrote:
Mon Aug 28, 2017 12:34 am
"Roth IRA earnings: Depends on age"

What does this mean? Do earnings not count as income after 60?
Withdrawals of earnings in a Roth IRA are tax free if the withdrawals are "qualified". In general after age 59.5 withdrawals of earnings are tax free, yes.

Under most circumstances that don't involve withdrawals of conversions that are less than 5 years old, all withdrawals from Roth accounts at age 60+ are tax free.
AND they don't count as income? That's what I'm trying to figure out.
Depends on where and why you are reporting your income. Roth withdrawals ARE treated as available income on the FAFSA. They are reported as nontaxable income and added to your AGI. They would also be included as income for Free/reduced lunch applications.
What's Fafsa?

JustinR
Posts: 399
Joined: Tue Apr 27, 2010 11:43 pm

Re: What counts as income? (planning retirement withdrawal strategy)

Post by JustinR » Mon Aug 28, 2017 4:25 pm

neurosphere wrote:
Mon Aug 28, 2017 7:41 am
Related question I've never really thought about before, and will ask here and then go look it up later (if no one beats me to it)...

How are after-tax IRA/401k --> Roth conversions (original contributions and earnings) treated with respect to penalties?
I would think all the rules are the same. Only difference being you don't pay any tax during the conversion.

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FiveK
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Re: What counts as income? (planning retirement withdrawal strategy)

Post by FiveK » Mon Aug 28, 2017 4:39 pm

JustinR wrote:
Mon Aug 28, 2017 4:20 pm
teen persuasion wrote:
Mon Aug 28, 2017 12:54 pm
JustinR wrote:
Mon Aug 28, 2017 12:57 am
neurosphere wrote:
Mon Aug 28, 2017 12:45 am
JustinR wrote:
Mon Aug 28, 2017 12:34 am
"Roth IRA earnings: Depends on age"

What does this mean? Do earnings not count as income after 60?
Withdrawals of earnings in a Roth IRA are tax free if the withdrawals are "qualified". In general after age 59.5 withdrawals of earnings are tax free, yes.

Under most circumstances that don't involve withdrawals of conversions that are less than 5 years old, all withdrawals from Roth accounts at age 60+ are tax free.
AND they don't count as income? That's what I'm trying to figure out.
Depends on where and why you are reporting your income. Roth withdrawals ARE treated as available income on the FAFSA. They are reported as nontaxable income and added to your AGI. They would also be included as income for Free/reduced lunch applications.
What's Fafsa?
See Fafsa - Google Search.

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