Top tax bracket for life, taking RMDs, stop making 401k contributions?

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illumination
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Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by illumination »

I was helping my parents with some planning and they have the blessing/curse of absurdly high RMDs. In addition, they own a business that has good part time income. And then they also have investment income.

I ran the RMDs
https://www.moneycalculator.org/Require ... tribution/

And it looks like the RMD alone is pushing them close to the top tax bracket. Then everything else pushes them deeper.
There's almost no realistic scenario I see where they aren't in the top (or 2nd to top) income tax bracket for the rest of their lives. Even if the business completely failed, they would still be in that range.

I also noticed they are still contributing the max to their respective 401k's from the business.
Does this make sense or is it self-defeating?

It seems like I can make a case both ways, curious if there are any rules of thumb for situations like this. Does it make sense to be aggressive with Roth conversions instead?

I appreciate the help.
JW-Retired
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by JW-Retired »

It would help us to know what their tax bracket is now, and how much time there is before they must take RMDs?
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bengal22
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by bengal22 »

Being in the top tax bracket in retirement is not a bad problem to have
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Spirit Rider
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by Spirit Rider »

If their 401k plan offers destinated Roth contributions. Just have them switch.
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TomatoTomahto
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by TomatoTomahto »

Spirit Rider wrote: Thu Oct 24, 2019 11:52 am If their 401k plan offers destinated Roth contributions. Just have them switch.
+1.

I did that a while ago. Better late than never.
I get the FI part but not the RE part of FIRE.
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retired@50
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by retired@50 »

illumination wrote: Thu Oct 24, 2019 10:48 am I was helping my parents with some planning and they have the blessing/curse of absurdly high RMDs. In addition, they own a business that has good part time income. And then they also have investment income.

I ran the RMDs
https://www.moneycalculator.org/Require ... tribution/

And it looks like the RMD alone is pushing them close to the top tax bracket. Then everything else pushes them deeper.
There's almost no realistic scenario I see where they aren't in the top (or 2nd to top) income tax bracket for the rest of their lives. Even if the business completely failed, they would still be in that range.

I also noticed they are still contributing the max to their respective 401k's from the business.
Does this make sense or is it self-defeating?
The typical reason, as far as taxes go, is to contribute to a 401k to get a "current year" tax break, with the hopes of being in a lower tax bracket during retirement. If this is impossible or unlikely, then it's just pushing the tax liability into the future. So, the next consideration becomes, do you think taxes will be higher or lower in the future? Will a president Biden or Warren raise or lower taxes? If you think taxes will be higher in the future, then paying taxes NOW would make sense. If you think taxes may go down in the future, then delaying would make sense. Obviously, this is hard to predict with any degree of certainty. Best of luck.

It seems like I can make a case both ways, curious if there are any rules of thumb for situations like this. Does it make sense to be aggressive with Roth conversions instead?

I appreciate the help.
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by Stinky »

Spirit Rider wrote: Thu Oct 24, 2019 11:52 am If their 401k plan offers destinated Roth contributions. Just have them switch.
Yes. Absolutely do this.
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lws
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by lws »

Similar situation.
Do the Roth if available then enjoy life.
Nice problem to have.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by TomatoTomahto »

lws wrote: Thu Oct 24, 2019 12:29 pm Similar situation.
Do the Roth if available then enjoy life.
Nice problem to have.
It is a nice problem to have. Also a nice problem is a 1:1 employer match which, by law, must go into traditional 401k, so you can only adjust so much. :D
I get the FI part but not the RE part of FIRE.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by Chadnudj »

illumination wrote: Thu Oct 24, 2019 10:48 am Does it make sense to be aggressive with Roth conversions instead?

I think you/they should be aggressive, and convert a lot (if not all) of it. It appears it won't change the marginal tax rate they pay, and they apparently have enough income from other sources that they don't really need this money at all, making it (perhaps) important for legacy purposes/leaving an inheritance. Roth IRAs are generally a lot better to inherit than traditional IRAs (no need to figure out inherited IRA RMDs, I don't think), so it would make that aspect easier in terms of estate planning.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by Jack FFR1846 »

Hiring someone to cart all the wheel barrows full of money to the vault might save some taxes as a business expense.
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illumination
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by illumination »

Spirit Rider wrote: Thu Oct 24, 2019 11:52 am If their 401k plan offers destinated Roth contributions. Just have them switch.
Their 401k plans are Solo 401k's through Schwab.

My understanding is the Roth 401k option is "difficult" to create for a situation like that with just an owner.

Is that not the case, or is there something available that easy to implement for an operation with no employees?

Thanks for the help.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by retired@50 »

illumination wrote: Thu Oct 24, 2019 4:47 pm
Spirit Rider wrote: Thu Oct 24, 2019 11:52 am If their 401k plan offers destinated Roth contributions. Just have them switch.
Their 401k plans are Solo 401k's through Schwab.

My understanding is the Roth 401k option is "difficult" to create for a situation like that with just an owner.

Is that not the case, or is there something available that easy to implement for an operation with no employees?

Thanks for the help.
It appears that contributions can be "Roth" in nature. See Vanguard page link below under the "Employee Contribution Limits" heading. It mentions Roth.
https://investor.vanguard.com/small-bus ... -solo-401k
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by Spirit Rider »

illumination wrote: Thu Oct 24, 2019 4:47 pm My understanding is the Roth 401k option is "difficult" to create for a situation like that with just an owner.
As retired@50 pointed out there is nothing difficult about Roth 401k contributions to a one-participant 401k plan. It is just that the provider must support the option. Schwab and Fidelity do not. E-Trade, TD Ameritrade and Vangurd do.

I suggest they amend their Schwab Individual 401k plan to E-Trade and do a trustee -> trustee transfer. E-Trade is unique in that they allow in-service Roth rollovers (IRRs). That may be valuable for them to "judiciously" rollover some plan pre-tax assets to the designated Roth account each year before the year they turn 70 1/2.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by Artsdoctor »

The reason why your parents have "absurdly high" RMDs is because they've been able to sock away absurdly high amounts into their tax-deferred account(s). The limits for solo 401k's are very high (currently $56,000 and more for a spouse, per year). The government's going to want some of that tax deferral.

At this point, I agree that switching to a solo Roth 401k is wise. The total tax in the long run may not be all that much different but the tax diversification would be helpful.

Don't forget to take state tax issues into consideration here, as well as estate planning for the heirs, since there's such a high amount in the tax-deferred accounts.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by illumination »

Spirit Rider wrote: Thu Oct 24, 2019 5:14 pm
illumination wrote: Thu Oct 24, 2019 4:47 pm My understanding is the Roth 401k option is "difficult" to create for a situation like that with just an owner.
As retired@50 pointed out there is nothing difficult about Roth 401k contributions to a one-participant 401k plan. It is just that the provider must support the option. Schwab and Fidelity do not. E-Trade, TD Ameritrade and Vangurd do.

I suggest they amend their Schwab Individual 401k plan to E-Trade and do a trustee -> trustee transfer. E-Trade is unique in that they allow in-service Roth rollovers (IRRs). That may be valuable for them to "judiciously" rollover some plan pre-tax assets to the designated Roth account each year before the year they turn 70 1/2.
Okay, that's great news!

For some reason I thought it required something more elaborate that had to be created. I didn't know it was some brokerages did not offer it.

So for the Solo Roth 401k, the maximum would be the "employee" contribution, and since they are both over the age of 50, that could potentially be $50k per year ($25k x 2)? The "employer" profit sharing though would have to be a regular 401k contribution? In which case, you would just not make this pre-tax contribution in such a scenario?

Thanks again
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by Spirit Rider »

illumination wrote: Thu Oct 24, 2019 5:31 pm So for the Solo Roth 401k, the maximum would be the "employee" contribution, and since they are both over the age of 50, that could potentially be $50k per year ($25k x 2)? The "employer" profit sharing though would have to be a regular 401k contribution? In which case, you would just not make this pre-tax contribution in such a scenario?
They could still make the pre-tax employer contribution and if they used E-Trade, they could immediately do an IRR. This would effectively be a "Roth" employer contribution.

If they are eligible for the QBI deduction, it might make sense for them to not make the employer contribution.

However, another option is to amend to a plan that supports employee after-tax contributions and IRRs and in-service rollovers.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by FiveK »

illumination wrote: Thu Oct 24, 2019 10:48 am It seems like I can make a case both ways, curious if there are any rules of thumb for situations like this. Does it make sense to be aggressive with Roth conversions instead?
If they will in fact be in the "top tax bracket for life", regardless of how much they convert from traditional to Roth, and they can use taxable funds to pay the tax on a conversion, then they should contribute and convert everything to Roth. See the previously linked section and the Maxing out your retirement accounts section of that wiki article.

If converting everything to Roth would decrease their retirement marginal tax rate significantly, then a sharper pencil is needed.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by RAchip »

Their RMD’s are $600,000?

At some point you can stop “saving for retirement.” When my net worth got above $30mm it just seemed to me that what was in my 401k really wouldnt matter and I stopped contributing. 401k’s are for regular people, not UHNW people.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by illumination »

RAchip wrote: Thu Oct 24, 2019 7:00 pm Their RMD’s are $600,000?

At some point you can stop “saving for retirement.” When my net worth got above $30mm it just seemed to me that what was in my 401k really wouldnt matter and I stopped contributing. 401k’s are for regular people, not UHNW people.

I look at it as just tax planning at this point, but if you want to give more away in taxes because you feel you earn too much for certain legal deductions and strategies, that's certainly your right.

I don't know that too many Bogleheads that think that way :sharebeer

There are generous charitable plans in place for this estate if it makes you feel better.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by Rus In Urbe »

Congrats to them. A very good problem to have.

In addition to switching to the Roths....

Create a Donor Advised Fund (DAF) through Vanguard (25K minimum required and $500 minimum gifts) or through Fidelity (lower minimums).

Have the tax accountant run the "sweet spot number" that will get them into the next lower bracket and sock away the tax deductible funds there.

Then have the fun of doling out gifts to charities.

May as well do some good with the extra money . . .

Cheers! Rus :beer
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by randomguy »

TomatoTomahto wrote: Thu Oct 24, 2019 2:03 pm
lws wrote: Thu Oct 24, 2019 12:29 pm Similar situation.
Do the Roth if available then enjoy life.
Nice problem to have.
It is a nice problem to have. Also a nice problem is a 1:1 employer match which, by law, must go into traditional 401k, so you can only adjust so much. :D
Don't do an employer match. Do an after tax contribution and roll it over to a ROTH.

With something 15 million in a 401(k), I think estate taxes probably matter as much as income taxes.
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Re: Top tax bracket for life, taking RMDs, stop making 401k contributions?

Post by illumination »

Spirit Rider wrote: Thu Oct 24, 2019 5:56 pm
illumination wrote: Thu Oct 24, 2019 5:31 pm So for the Solo Roth 401k, the maximum would be the "employee" contribution, and since they are both over the age of 50, that could potentially be $50k per year ($25k x 2)? The "employer" profit sharing though would have to be a regular 401k contribution? In which case, you would just not make this pre-tax contribution in such a scenario?
They could still make the pre-tax employer contribution and if they used E-Trade, they could immediately do an IRR. This would effectively be a "Roth" employer contribution.

If they are eligible for the QBI deduction, it might make sense for them to not make the employer contribution.

However, another option is to amend to a plan that supports employee after-tax contributions and IRRs and in-service rollovers.

Thanks for all the guidance on this.

Currently, they have a relatively small amount in a Solo 401k for each at Schwab. The really large RMD's are from a separate IRA.

My understanding is you can't have a Roth 401k and your Solo 401k on the same plan operating at different brokerages? Or am I incorrect about that? If they open a Roth 401k at E-trade, do these Schwab 401k accounts need to be moved and closed? Or can they just be drawn down with RMDs in the same Schwab account without new future contributions?

Should they convert the funds from the 401k to the IRA at Schwab? And then open a 401k at E-trade where they will then make Roth 401k employee contributions?

They have a CPA that has done their tax preparation for a while, and I'd probably want to run this by him in case there's something I missed. But are there common screwups here that people tend to make?

Thanks again
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