Secure act - should I shift to taxable

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nix4me
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Secure act - should I shift to taxable

Post by nix4me »

So after reading the changes coming with secure act, I have even more concerns now with retirement account tax bombs. I absolutely do not want to leave a multi-million dollar tax bomb to my daughter that she will have to liquidate in 10 years, that is insane.

So I’m thinking I need to drop my 401k to minimum required to get match, ensure Roth’s remain maxed each year, and start loading up taxable account instead of 401k.

Anyone else making changes because of the new unfavorable rules?
livesoft
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Re: Secure act - should I shift to taxable

Post by livesoft »

No, I don't think you should shift to taxable. I am not making any changes myself. I continue to make Roth conversions because money that would have been taxed at 33% is now taxed at 12% and lower ... even at low as 0%> My kids? Well, they will be multimillionaires eventually from their own endeavors and don't need any help from me. That means I can give away money to charitable organizations without paying any taxes.
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stan1
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Re: Secure act - should I shift to taxable

Post by stan1 »

You need to give us some data to work with. Spouse? Age? Size of account balances? Your tax rate? Your daughters tax rate?

One approach you didn't mention was to switch to Roth 401K contributions. You can also do Roth conversions after you retire and might be in a lower tax bracket.

It is a mistake to think of it as a "tax bomb". The money in a Traditional 401K/IRA is tax deferred not tax free. It is not yours even though it shows up in your account. You still get decades of tax deferral.

Tax preferences of taxable accounts could change too. Lower tax rates for qualified dividends and capital gains as well as stepped up cost basis could change too.
NJ_Bogler
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Re: Secure act - should I shift to taxable

Post by NJ_Bogler »

Why is this “insane”? Your child is set to receive a multimillion dollar inheritance of money that was never taxed (your post implies that it’s all in your 401k), and accordingly they will need to pay taxes on it. I frankly don’t see what the big deal is. If the money had been in your 401k, you never paid taxes on it. If you want to defer more of it to taxable, then you’ll pay the taxes on it instead.

I guess the question is who you want to pay the taxes and when.

I suspect in the new year there will be a lot more discussion on potential mitigation strategies. But I just don’t see it as a colossal disaster. Tax codes can change whenever so best you can do is remain as diversified as possible.
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Re: Secure act - should I shift to taxable

Post by sailaway »

If you are worried about your kid paying taxes, you could leave the money to charity, instead.
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Re: Secure act - should I shift to taxable

Post by retired@50 »

A tax delayed is better than a tax paid. You imply you're handing your heir(s) a bad thing. I don't imagine your daughter would see it the same way.

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Wiggums
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Re: Secure act - should I shift to taxable

Post by Wiggums »

Tax codes change and we just need to do the best we can.
Roth and Roth 401k came later in my working career. By that time, we earned too much and I didn’t know about back door method. I deferred the tax for over 30 years. I think that was the best option at the time. That is still a good deal.
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nix4me
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Re: Secure act - should I shift to taxable

Post by nix4me »

The elimination of stretch means the required distributions she will have take will go up thus the tax rate will go up significantly. Tax rates are graduated. You can’t just say “somebody has to pay the tax”. I could pay it now at 22% rate, she might have to pay some of it 10 years in a row at 34% or higher rate. This is a problem that requires some investigation.
stan1
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Re: Secure act - should I shift to taxable

Post by stan1 »

nix4me wrote: Mon Dec 30, 2019 10:50 am The elimination of stretch means the required distributions she will have take will go up thus the tax rate will go up significantly. Tax rates are graduated. You can’t just say “somebody has to pay the tax”. I could pay it now at 22% rate, she might have to pay some of it 10 years in a row at 34% or higher rate. This is a problem that requires some investigation.
If you are saying her tax rate is likely to be higher than yours you should do Roth Contributions and Roth Conversions when your income drops.

Impossible to predict what might be in 30-50 years if you expect to live that long. Assuming tax laws would never change has always been a flawed assumption. Asset location diversification is another strategy.
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Darth Xanadu
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Re: Secure act - should I shift to taxable

Post by Darth Xanadu »

stan1 wrote: Mon Dec 30, 2019 10:54 am
nix4me wrote: Mon Dec 30, 2019 10:50 am The elimination of stretch means the required distributions she will have take will go up thus the tax rate will go up significantly. Tax rates are graduated. You can’t just say “somebody has to pay the tax”. I could pay it now at 22% rate, she might have to pay some of it 10 years in a row at 34% or higher rate. This is a problem that requires some investigation.
If you are saying her tax rate is likely to be higher than yours you should do Roth Contributions and Roth Conversions when your income drops.
+1
I plan on continuing to defer tax as much as possible, with an eye toward paying very low taxes on conversions down the road.
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Re: Secure act - should I shift to taxable

Post by bsteiner »

No. IRAs still provide substantial income tax benefits, just not as much as before.

The best way to look at a traditional IRA is that it's part (1 minus the tax rate) yours and part (the tax rate) the government's. The income and gains on your share are tax-free.

If, as a result of the stretch being limited to 10 years, the distributions will be taxable at a rate higher than your tax rate, you might do some Roth conversions.

Another possibility is leaving your traditional IRA in a charitable remainder trust that makes distributions to her for life, with remainder to charity. The actuarial value of the charity's remainder interest has to be at least 10% of the initial value of the trust. However, the ability to replicate the stretch may more than offset the loss of the remainder.
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Leif
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Re: Secure act - should I shift to taxable

Post by Leif »

It is a tax and estate question, so you need to analyze it from that perspective. Your tax rate and the tax rate of the beneficiaries. Admittedly difficult because we don't know future tax rates.

I'm accelerating the conversion amount to my Roth.
Last edited by Leif on Mon Dec 30, 2019 11:10 am, edited 1 time in total.
Topic Author
nix4me
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Re: Secure act - should I shift to taxable

Post by nix4me »

Leif wrote: Mon Dec 30, 2019 11:00 am It is a tax and estate question, so you need to analysis it from that perspective. Your tax rate and the tax rate of the beneficiaries. Admittedly difficult because we don't know future tax rates.

I'm accelerating the conversion amount to my Roth.
Exactly my point. Thanks. I will analyze conversions along with a more balanced approach to filling accounts.
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Re: Secure act - should I shift to taxable

Post by retiredjg »

If your tax-deferred assets are already too large, maybe you could use Roth 401k if you have it available. Won't help much, but won't hurt.
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nix4me
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Re: Secure act - should I shift to taxable

Post by nix4me »

retiredjg wrote: Mon Dec 30, 2019 11:10 am If your tax-deferred assets are already too large, maybe you could use Roth 401k if you have it available. Won't help much, but won't hurt.
Yes I have the option and I’m already utilizing somewhat, but I might increase.
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Re: Secure act - should I shift to taxable

Post by sawdust60 »

Your insight might correct for you and others. The change is likely to shift more savings into Roth accounts.

One thing that it does for me is that I have less concern over Roth conversions at 22%, and avoiding the first IRMAA bracket.

And if I were young/working with expectations of large retirement savings, I would likely do Roth at 22% and 24%, particularly if there is the potential for lump sum distribution of pension into an IRA.

A reason not to be 100% Roth is if there might be NUA potential in the tax deferred 401K.

And as others have noted, your tax rates applicable to IRA distributions can be low/zero in years of high medical expenses or qualified charitable distributions.
elainet7
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Re: Secure act - should I shift to taxable

Post by elainet7 »

live till 100 so beneficiaries will be retired
this is one big massive tax accelerator for those of Us with large Iras from working hard and saving diligently
the money would get taxed entirely but in a tax efficient manner for the beneficiaries
imagine a beneficiary in a hi income bracket in a hi tax state like NYC-might pay 50-60 tax yearly on the inherited Ira; insanity
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2pedals
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Re: Secure act - should I shift to taxable

Post by 2pedals »

The SECURE act makes me feel insecure about possible future tax law changes. Sweeping tax law changes makes what was seemingly an optimized a tax strategy an ineffective strategy. Having said that, it seems to make sense to adjust and do more partial Roth conversions when taxes are expected to be low.
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willthrill81
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Re: Secure act - should I shift to taxable

Post by willthrill81 »

nix4me wrote: Mon Dec 30, 2019 11:05 am
Leif wrote: Mon Dec 30, 2019 11:00 am It is a tax and estate question, so you need to analysis it from that perspective. Your tax rate and the tax rate of the beneficiaries. Admittedly difficult because we don't know future tax rates.

I'm accelerating the conversion amount to my Roth.
Exactly my point. Thanks. I will analyze conversions along with a more balanced approach to filling accounts.
The SECURE act certainly makes Roth conversions even more attractive than they were before. We're planning on doing Roth conversions to the top of our current tax bracket for a long time, perhaps until either my DW or I pass away and the survivor has to file single. It's just a no-brainer. We could easily be doing Roth conversions for 50 years.
2pedals wrote: Mon Dec 30, 2019 12:27 pm The SECURE act makes me feel insecure about possible future tax law changes. Sweeping tax law changes makes what was seemingly an optimized a tax strategy an ineffective strategy.
I partly agree, but it's important to keep in mind that through U.S. history, tax laws have been fluid. We've had three major changes to tax law in the last 20 years, not counting the SECURE act. Strategies as effective as the stretch IRA for greatly minimizing taxes have often been shot down.

But honestly, I don't think the elimination of the stretch IRA is much of an issue for anyone. For instance, paying an additional 10-15% on the withdrawals should not be earth shattering for anyone (e.g. 24% vs. 12%). Even the very wealthy have the bulk of their investments in taxable accounts that are still treated very favorably for inheritance purposes by tax law.
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Re: Secure act - should I shift to taxable

Post by bigROI »

True that the Roth conversions look more appealing now then before however I worry that it will be the next vehicle picked don to pay taxes or prop up Social Security. For now I will balance some in deferred and some as a Roth hedging for the next "Secure Act" type change that will probably come and force another planning change.
A penny saved is much more then a penny earned when you consider the tax/SS/medicare cut.
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Re: Secure act - should I shift to taxable

Post by willthrill81 »

bigROI wrote: Mon Dec 30, 2019 12:40 pm True that the Roth conversions look more appealing now then before however I worry that it will be the next vehicle picked don to pay taxes or prop up Social Security.
I certainly won't say that your concern is unwarranted. Nothing is 'sacred' when it comes to tax law. That being said, American's total quantity of tax-deferred assets is something like ten times more than the total quantity of Roth assets, so there's a lot more to gain from taxing the former than the latter. I think it's more likely that the total and/or annual amount of Roth conversions could be limited. But I won't say more due to forum rules.
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Nate79
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Re: Secure act - should I shift to taxable

Post by Nate79 »

Tax laws change all the time. I think it is highly likely that this new one will change in the future. As will tax rates, types of accounts available, etc. What if capital gains tax rate changed to 50%? Then all your effort would have created a new tax bomb.

The future can not be predicted no matter how many extrapolations and excel sheets math nerds make. I would suggest a nice mix of taxable, tax free and tax deferred to hedge your bets realizing the rules for any of these accounts can change at any time.
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Re: Secure act - should I shift to taxable

Post by GerryL »

I intend to up my QCDs so that any non-charity beneficiaries won't be burdened by inheriting money on which they will have to pay taxes. :wink:

It would be nice if they further tweak the new rules to allow QCDs to be extended to the limited-stretch inherited IRAs. That way beneficiaries would have more flexibility for tax planning.
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Re: Secure act - should I shift to taxable

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nix4me wrote: Mon Dec 30, 2019 10:10 am So after reading the changes coming with secure act, I have even more concerns now with retirement account tax bombs. I absolutely do not want to leave a multi-million dollar tax bomb to my daughter that she will have to liquidate in 10 years, that is insane.

So I’m thinking I need to drop my 401k to minimum required to get match, ensure Roth’s remain maxed each year, and start loading up taxable account instead of 401k.
If you pay the taxes, your daughter won't have to. Of course you'll have less to leave her - but no bomb!
Anyone else making changes because of the new unfavorable rules?
Not me.
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Re: Secure act - should I shift to taxable

Post by JoeRetire »

nix4me wrote: Mon Dec 30, 2019 10:50 am The elimination of stretch means the required distributions she will have take will go up thus the tax rate will go up significantly.
might go up significantly.

As always, it depends.
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Re: Secure act - should I shift to taxable

Post by grabiner »

nix4me wrote: Mon Dec 30, 2019 10:10 am So after reading the changes coming with secure act, I have even more concerns now with retirement account tax bombs. I absolutely do not want to leave a multi-million dollar tax bomb to my daughter that she will have to liquidate in 10 years, that is insane.
The way to avoid this is to take the withdawals over a longer period of time. Instead of leaving $3M to your daughter, convert some from traditional to Roth every your during your retirement, up to the top of the appropriate tax bracket. You might pay tax on 2/3 of the money in your own retirement, and then leave $1M in a traditional IRA (and a large Roth IRA) to your daughter who can withdraw $100K per year. Another advantage of doing this is that you reduce your own RMDs, so you can keep more tax-deferred space in retirement (unless you are already donating all your RMDs to charity).

If your employer offers a Roth 401(k), this may also be a better option for money you expect to be inherited, as you can roll the Roth 401(k) into a Roth IRA when you retire. Your heirs will still have to withdraw the inherited Roth IRA within ten years, but it won't increase their tax bill by any more than the tax on the dividends they earn when they move it to a taxable account.
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Re: Secure act - should I shift to taxable

Post by shess »

nix4me wrote: Mon Dec 30, 2019 10:10 am So I’m thinking I need to drop my 401k to minimum required to get match, ensure Roth’s remain maxed each year, and start loading up taxable account instead of 401k.
It seems to me that if you can make Roth contributions, they are strictly better than taxable accounts for beneficiaries. In either situation, you'll pay taxes on the contributions. In theory, the taxable account gets the step-up at death so taxes are a wash, but the Roth avoids taxation on the earnings your positions generate while you're alive, and on capital gains from any transactions you engage in, such as for rebalancing. Sure, they still have to liquidate things within ten years, but I sure hope you aren't expecting your heirs to hold onto the specific stock portfolio you're giving them...
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Re: Secure act - should I shift to taxable

Post by JBTX »

willthrill81 wrote: Mon Dec 30, 2019 12:47 pm
bigROI wrote: Mon Dec 30, 2019 12:40 pm True that the Roth conversions look more appealing now then before however I worry that it will be the next vehicle picked don to pay taxes or prop up Social Security.
I certainly won't say that your concern is unwarranted. Nothing is 'sacred' when it comes to tax law. That being said, American's total quantity of tax-deferred assets is something like ten times more than the total quantity of Roth assets, so there's a lot more to gain from taxing the former than the latter. I think it's more likely that the total and/or annual amount of Roth conversions could be limited. But I won't say more due to forum rules.
The thing about Roth conversions is they raise federal revenue in the short term. Given that it wouldn't seem likely that they would be curbed.

A lot of people seem to fear eventual taxation of Roths. While anything is possible, it would be fairly unprecedented, given:

- it would essentially retroactively tax gains that were specifically designated as tax free
- it would turn Roths into non deductible IRAS
- I don't think there is any formal basis tracking of Roths required currently. You have to have basis to determine taxable gains.

A more plausible scenario would be limiting the size of tax advantaged accounts (this has been proposed in a couple of presidential budgets) or eliminating future Roths.

It seems the following would be more likely that retroactively taxing Roths:

- increase in ordinary income tax rates (would hurt traditional IRAS)
- increase capital gains rates or tax them as ordinary income (would hurt taxable)
- eliminate step up of basis on death - this has been proposed before (would hurt taxable)

The only point is it is impossible to predict what may happen, so a dramatic change in any direction is probably unwarranted. Having said that my leaning my 401k contributions more towards Roth. It is unlikely we will ever be in the lowest tax brackets.
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Re: Secure act - should I shift to taxable

Post by GerryL »

JBTX wrote: Tue Dec 31, 2019 12:53 am

A more plausible scenario would be limiting the size of tax advantaged accounts (this has been proposed in a couple of presidential budgets) or eliminating future Roths.
I agree that limiting the size of tax-advantaged accounts is a more plausible scenario, one that would focus on making these vehicles serve the use for which they were originally intended.
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Re: Secure act - should I shift to taxable

Post by JBTX »

HEDGEFUNDIE wrote: Tue Dec 31, 2019 1:13 am This and the other SECURE act threads makes me think people have been saving way too much money.

Hey Bogleheads, you can spend some money too! If it goes against your very nature, just think about it as an economic boost- It’ll be good for your investments!
psy1 wrote: Mon Dec 30, 2019 5:49 pm The SECURE act is appropriately named because it secures billions of unjust tax dollars for the federal government. I have spent my entire working/saving/investing life under one set of rules and and have spent a lot of time and money developing an estate plan based on established laws. Then, once I have some money that I can leave behind, the government decides to take a hefty chunk of it.
Another good reason to spend more money - keeps it out of government hands!

Or just invest it in leveraged strategies that can lose 95% of your investments!
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Re: Secure act - should I shift to taxable

Post by southerndoc »

nix4me wrote: Mon Dec 30, 2019 10:10 am So after reading the changes coming with secure act, I have even more concerns now with retirement account tax bombs. I absolutely do not want to leave a multi-million dollar tax bomb to my daughter that she will have to liquidate in 10 years, that is insane.

So I’m thinking I need to drop my 401k to minimum required to get match, ensure Roth’s remain maxed each year, and start loading up taxable account instead of 401k.

Anyone else making changes because of the new unfavorable rules?
You make it sound as if the tax bill will be more than what your daughter will inherit.
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Re: Secure act - should I shift to taxable

Post by AlphaLess »

nix4me wrote: Mon Dec 30, 2019 10:10 am So after reading the changes coming with secure act, I have even more concerns now with retirement account tax bombs. I absolutely do not want to leave a multi-million dollar tax bomb to my daughter that she will have to liquidate in 10 years, that is insane.

So I’m thinking I need to drop my 401k to minimum required to get match, ensure Roth’s remain maxed each year, and start loading up taxable account instead of 401k.

Anyone else making changes because of the new unfavorable rules?
If your 401K has a ROTH option, and you are in a high tax bracket, now there is EVEN more reasons to do that (ROTH) vs pre-tax.
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Re: Secure act - should I shift to taxable

Post by Wanderingwheelz »

nix4me wrote: Mon Dec 30, 2019 10:10 am So after reading the changes coming with secure act, I have even more concerns now with retirement account tax bombs. I absolutely do not want to leave a multi-million dollar tax bomb to my daughter that she will have to liquidate in 10 years, that is insane.

So I’m thinking I need to drop my 401k to minimum required to get match, ensure Roth’s remain maxed each year, and start loading up taxable account instead of 401k.

Anyone else making changes because of the new unfavorable rules?
I’ve always felt good about having a larger taxable investment account than tax deferred accounts (roughly 75/25) since my income tax has already been paid on it. My wife and I still both max out all available tax deferred accounts each year, though.

If you use highly tax efficient stock index funds that are not high yielding, as well as municipal bonds in your taxable accounts, you’ll be just fine over the long haul.
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Re: Secure act - should I shift to taxable

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Re: Secure act - should I shift to taxable

Post by Wiggums »

grabiner wrote: Mon Dec 30, 2019 8:45 pm The way to avoid this is to take the withdawals over a longer period of time. Instead of leaving $3M to your daughter, convert some from traditional to Roth every your during your retirement, up to the top of the appropriate tax bracket. You might pay tax on 2/3 of the money in your own retirement, and then leave $1M in a traditional IRA (and a large Roth IRA) to your daughter who can withdraw $100K per year. Another advantage of doing this is that you reduce your own RMDs, so you can keep more tax-deferred space in retirement (unless you are already donating all your RMDs to charity).

If your employer offers a Roth 401(k), this may also be a better option for money you expect to be inherited, as you can roll the Roth 401(k) into a Roth IRA when you retire. Your heirs will still have to withdraw the inherited Roth IRA within ten years, but it won't increase their tax bill by any more than the tax on the dividends they earn when they move it to a taxable account.
This is our plan and I think it still makes the most sense for our portfolio.
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Re: Secure act - should I shift to taxable

Post by 2pedals »

Wiggums wrote: Tue Dec 31, 2019 12:31 pm
grabiner wrote: Mon Dec 30, 2019 8:45 pm The way to avoid this is to take the withdawals over a longer period of time. Instead of leaving $3M to your daughter, convert some from traditional to Roth every your during your retirement, up to the top of the appropriate tax bracket. You might pay tax on 2/3 of the money in your own retirement, and then leave $1M in a traditional IRA (and a large Roth IRA) to your daughter who can withdraw $100K per year. Another advantage of doing this is that you reduce your own RMDs, so you can keep more tax-deferred space in retirement (unless you are already donating all your RMDs to charity).

If your employer offers a Roth 401(k), this may also be a better option for money you expect to be inherited, as you can roll the Roth 401(k) into a Roth IRA when you retire. Your heirs will still have to withdraw the inherited Roth IRA within ten years, but it won't increase their tax bill by any more than the tax on the dividends they earn when they move it to a taxable account.
This is our plan and I think it still makes the most sense for our portfolio.
Keep in mind this is balancing act between you and the heirs. If your heirs are expected to be in a lower tax bracket after the inherited tax-deferred is spread out over 10 years than what you will pay, don't do it. Your heirs might have ways to limit income via marriage, kids, home tax deductions, unemployment, stay at home mom and dads, etc that will add value to their lifestyle as well. For some especially single retirees might be in a higher tax bracket, with dual pensions, social security, RMDs, dividends, etc.
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Re: Secure act - should I shift to taxable

Post by gerntz »

nix4me wrote: Mon Dec 30, 2019 10:10 am So after reading the changes coming with secure act, I have even more concerns now with retirement account tax bombs. I absolutely do not want to leave a multi-million dollar tax bomb to my daughter that she will have to liquidate in 10 years, that is insane.

So I’m thinking I need to drop my 401k to minimum required to get match, ensure Roth’s remain maxed each year, and start loading up taxable account instead of 401k.

Anyone else making changes because of the new unfavorable rules?
Don't fault you for wanting to minimize the governments' takes. Split up who you leave it to - like grandchildren as well as children. Their separate tax rates will be lower than if all goes to daughter only so that total taxes paid will be less.
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Re: Secure act - should I shift to taxable

Post by elainet7 »

our large ira is too big that doing 50-75k roth conversions long term might not do much
will take addl distributions and invest in taxable till end of 2025 when tax cuts expire
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Re: Secure act - should I shift to taxable

Post by shess »

elainet7 wrote: Wed Jan 01, 2020 9:25 am our large ira is too big that doing 50-75k roth conversions long term might not do much
will take addl distributions and invest in taxable till end of 2025 when tax cuts expire
OK, being honest here, I don't fully understand your reasoning. If you needed to take tIRA distributions of $250k/year to "do much", then that is a distinct decision from whether to do a Roth conversion or to invest it in a taxable account. In the taxable account, you'll receive yearly dividends, which will add yearly tax cost until you die, while in Roth there will be no tax cost.

I can't see any option where taxable beats Roth in strict financial terms. Best case is that you buy-and-hold taxable positions which pay no dividends and get the step-up at death - which merely equals the performance of the Roth holding the same investments. But with the Roth, you can invest in dividend-paying stocks, you can rebalance (or merely change your mind), and you can withdraw funds you didn't realize you'd need without penalty (certain conditions apply, yada yada).

I guess I'm not seeing the love for taxable in this case.
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Re: Secure act - should I shift to taxable

Post by willthrill81 »

shess wrote: Wed Jan 01, 2020 12:55 pm I can't see any option where taxable beats Roth in strict financial terms.
It's theoretically possible, but in the real world, it's extremely unlikely. I agree that Roth conversions make a lot more sense than taxable in this sort of instance.
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Re: Secure act - should I shift to taxable

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This is a "no politics" forum. I removed a post conjecturing on future changes to taxation of Roth distributions by beneficiaries (proposed legislation). As a reminder, see: Politics and Religion
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Re: Secure act - should I shift to taxable

Post by shess »

willthrill81 wrote: Wed Jan 01, 2020 1:04 pm
shess wrote: Wed Jan 01, 2020 12:55 pm I can't see any option where taxable beats Roth in strict financial terms.
It's theoretically possible, but in the real world, it's extremely unlikely. I agree that Roth conversions make a lot more sense than taxable in this sort of instance.
But, where? I mean in theory, which cases would taking a tIRA distribution and investing in taxable beat doing a conversion to Roth IRA and investing in the same asset? Maybe you could have some sort of foreign tax-credit thing going on?

I'll grant that there are cases where it wouldn't make sense to liquidate an existing taxable account to support Roth conversions. For instance, if you have a very-low-basis position which you can leave to heirs with the basis step-up. I'm just having troubles thinking up a case where it makes sense to liquidate a tIRA account and invest it in a taxable account rather than a Roth IRA. I mean other than constructed things, like simply not being able to own some asset in a Roth IRA (which would have also applied to the tIRA).
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Re: Secure act - should I shift to taxable

Post by willthrill81 »

shess wrote: Wed Jan 01, 2020 1:23 pm
willthrill81 wrote: Wed Jan 01, 2020 1:04 pm
shess wrote: Wed Jan 01, 2020 12:55 pm I can't see any option where taxable beats Roth in strict financial terms.
It's theoretically possible, but in the real world, it's extremely unlikely. I agree that Roth conversions make a lot more sense than taxable in this sort of instance.
But, where? I mean in theory, which cases would taking a tIRA distribution and investing in taxable beat doing a conversion to Roth IRA and investing in the same asset? Maybe you could have some sort of foreign tax-credit thing going on?

I'll grant that there are cases where it wouldn't make sense to liquidate an existing taxable account to support Roth conversions. For instance, if you have a very-low-basis position which you can leave to heirs with the basis step-up. I'm just having troubles thinking up a case where it makes sense to liquidate a tIRA account and invest it in a taxable account rather than a Roth IRA. I mean other than constructed things, like simply not being able to own some asset in a Roth IRA (which would have also applied to the tIRA).
Beginning with this post in a recent thread, a few posters outlined some hypothetical situations where taxable could beat Roth. But as I noted, they seem to be pretty rare in the real world, and even when they exist, the benefit seems to be very small.
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Re: Secure act - should I shift to taxable

Post by shess »

willthrill81 wrote: Wed Jan 01, 2020 1:28 pm
shess wrote: Wed Jan 01, 2020 1:23 pm
willthrill81 wrote: Wed Jan 01, 2020 1:04 pm
shess wrote: Wed Jan 01, 2020 12:55 pm I can't see any option where taxable beats Roth in strict financial terms.
It's theoretically possible, but in the real world, it's extremely unlikely. I agree that Roth conversions make a lot more sense than taxable in this sort of instance.
But, where? I mean in theory, which cases would taking a tIRA distribution and investing in taxable beat doing a conversion to Roth IRA and investing in the same asset? Maybe you could have some sort of foreign tax-credit thing going on?

I'll grant that there are cases where it wouldn't make sense to liquidate an existing taxable account to support Roth conversions. For instance, if you have a very-low-basis position which you can leave to heirs with the basis step-up. I'm just having troubles thinking up a case where it makes sense to liquidate a tIRA account and invest it in a taxable account rather than a Roth IRA. I mean other than constructed things, like simply not being able to own some asset in a Roth IRA (which would have also applied to the tIRA).
Beginning with this post in a recent thread, a few posters outlined some hypothetical situations where taxable could beat Roth. But as I noted, they seem to be pretty rare in the real world, and even when they exist, the benefit seems to be very small.
Hmm. OK, I was a little centered on the idea of accomplishing it in a case where your tIRA is bigger. If your tIRA is of a size where RMDs aren't going to force you past the 0% LTCG rate, then there are some definite possibilities ... though in that case, I'm not sure I'm going to worry a ton about the tax hit of inheriting that tIRA, either.

Still, a good thread to look at if you're thinking along these lines.
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Re: Secure act - should I shift to taxable

Post by elainet7 »

the issue is not paying taxes on the inherited IRA, its the change in distribution rules for those inheriting it
Prior to this law, the proceeds could be distributed in a tax efficient manner
Imagine when the hi earner inherits a large IRA and pays 50% tax or more on every dollar
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Re: Secure act - should I shift to taxable

Post by willthrill81 »

elainet7 wrote: Wed Jan 01, 2020 2:54 pm the issue is not paying taxes on the inherited IRA, its the change in distribution rules for those inheriting it
Prior to this law, the proceeds could be distributed in a tax efficient manner
Imagine when the hi earner inherits a large IRA and pays 50% tax or more on every dollar
Most heirs will be in their 50s or 60s when they inherit traditional IRAs, due to the common age differences between parents and children combined with the age of most parents when they pass away. It's very plausible that an heir who is currently in a high tax bracket at such an age can take an early retirement that will be funded by the inherited IRA, leaving their own retirement accounts to keep growing. And one plus of the 10 year rule is that no withdrawals are mandated until the last day of the 10th year, so the heir might defer all withdrawals for several years before beginning that process.

Now it's obviously true that a fair number of heirs will be in their 20s, 30s, or 40s, and the 10 year rule certainly isn't good for them. But if nothing else, taking withdrawals from traditional IRAs may help them to increase their own tax-deferred contributions.

It's certainly not all doom and gloom.
Last edited by willthrill81 on Wed Jan 01, 2020 4:44 pm, edited 1 time in total.
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Re: Secure act - should I shift to taxable

Post by elainet7 »

its one big money grab by changing the rules in the middle of the game
most will take the inherited ira in increments
one would be sick writing a huge tax payment to uncle sam end of year 10
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Re: Secure act - should I shift to taxable

Post by elainet7 »

best strategy is to live till 100-heirs will all be retired
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Re: Secure act - should I shift to taxable

Post by stan1 »

elainet7 wrote: Wed Jan 01, 2020 4:03 pm
one would be sick writing a huge tax payment to uncle sam end of year 10
Then do the Roth conversion for him while you are still alive so he won't get "sick" paying back your deferred taxes.

The IRA and 401K custodians would do account holders a big favor if they prominently displayed a tax adjusted balance on Traditional accounts (easy to ask the account owner for a tax rate to use).
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Re: Secure act - should I shift to taxable

Post by elainet7 »

everyone ira owner knows deferred taxes are due but to change the rules so dramatically will hurt many that inherit to the tune of hundreds of thousands in large iras
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