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New Widow and Questions

Posted: Mon Jun 29, 2020 6:47 pm
by Learning99
removed

Re: New Widow and Questions

Posted: Mon Jun 29, 2020 8:11 pm
by retired@50
Sorry to read about your loss.
Welcome to the forum.

If you retire at 55 won't you have several years to perform partial Roth conversions before starting Social Security? You could delay SS all the way until 70 if you need additional time to convert funds.

Have you calculated how much all RMDs will total, and when they will have to be taken? For your personal 401k or IRA you'll still get to wait until 72 won't you? So, as a spousal inheritor, are you forced to empty His IRA and His 401k on an accelerated schedule? As I understand it, the rules are different if you're a spouse versus non-spouse inheritor.

Regards,

Re: New Widow and Questions

Posted: Mon Jun 29, 2020 8:17 pm
by livesoft
Learning99 wrote:
Mon Jun 29, 2020 6:47 pm
Inherited IRA $345,000 (I understand that I can withdraw penalty free as widow before 59 1/2)
That may or may not be true. The reason is that you did not state whether this inherited IRA was from your spouse or a non-spouse. And if inherited from your spouse, then you can treat it as your own IRA or not. If from your spouse and you treat it as your own IRA, then I think you cannot withdraw penalty-free before 59 1/2. You may wish to think about the advantages and disadvantages both ways.

Re: New Widow and Questions

Posted: Mon Jun 29, 2020 10:29 pm
by celia
Learning99 wrote:
Mon Jun 29, 2020 6:47 pm
Income ~$100,000 to $110,000 p/y
Retirement income needed $52,000 & paid off mortgage
Hoping retiring as soon as the money is there, hopefully no later than 55.

Tax Deferred
401(k) $290,000
Rollover IRA $150,000
Pension $52,000 (Lump sum value based on taking full amount at 55)
Inherited IRA $345,000 (I understand that I can withdraw penalty free as widow before 59 1/2)
Survivor SS ~$15,000 per year starting at age 60
Normal SS @ 62: $20,000
Normal SS @ 67: $28,000

...I’m open to all advice but my main concerns are Bogleheads favorite topics…Roth Conversions and Traditional vs Roth 401(k).

Currently we were contributing strictly to traditional 401(k) with the idea that we would do conversions during our early retirement years to at least the top of 12% bracket. Now that bracket is cut in half for me beginning next year so my thoughts are if I should do a Roth conversion this year while still filing MFJ in the 22% bracket and plan on switching 401(k) to Roth, at least partially. I’m thinking this may be a good idea based on the potential of having most funds in tax deferred and ending up with RMD’s well above my annual spending (tax bomb) along with making more SS taxable and hitting possible Medicare means testing. Am I way off here?
I was about half-way through your post when this exact suggestion was forming in my head. Yes! you should definitely take advantage of this being the last year you can file MFJ and do some amount of Roth conversions.

Let’s leave this year alone for a second and I see that your wages alone put you near the bottom of the 24% tax bracket next year (while filing Single) and while you continue to have a full year of wages. But after that, as your $52K pension starts, you can do Roth conversions to the top of the 22% bracket, while realizing the $800K tax-deferred has likely grown until then. I suggest making a chart showing your expected income for each year until you turn 73 (after RMDs start) and estimate how much more you can convert while going to the top of the 22% bracket. If this looks like it is hardly putting a dent in the tax-deferred (as it continues to grow each year), then up your yearly taxable income $40k or $50k each year. The ‘trick’ is to find where your ‘bar’ should be.

Most of us have found that it is more tax-efficient to keep our Taxable Income (and our taxes) level each year starting with retirement going forward than to have low income during early retirement followed by many years of high income once RMDs start. Another thing to consider is letting your own SS max out as you delay taking it until 70. This will give you more room in your 60s for Roth conversions and you can live off withdrawals from tax-deferred until then. (The taxes on withdrawals will be the same whether they are converted or not.)

Now, for this year, looking at both of your incomes and anything else that would show up on your tax return, since you are near the bottom of the 22% tax bracket for MFJ with your income alone, I would convert to near the top of the 24% bracket. Use last year’s return as a guide to show how much you are used to paying when both of you worked (I assume). I would keep an eye on the market and if it drops significantly, I would take advantage of that and even convert more than you normally would as you can convert more shares when the price per share is lower.

Here’s a chart of current tax brackets. Don’t forget to subtract the standard deduction from your expected income each year before using the chart.

Re: New Widow and Questions

Posted: Mon Jun 29, 2020 10:49 pm
by celia
livesoft wrote:
Mon Jun 29, 2020 8:17 pm
Learning99 wrote:
Mon Jun 29, 2020 6:47 pm
Inherited IRA $345,000 (I understand that I can withdraw penalty free as widow before 59 1/2)
That may or may not be true. The reason is that you did not state whether this inherited IRA was from your spouse or a non-spouse. And if inherited from your spouse, then you can treat it as your own IRA or not. If from your spouse and you treat it as your own IRA, then I think you cannot withdraw penalty-free before 59 1/2. You may wish to think about the advantages and disadvantages both ways.
If this is from your spouse, you can withdraw from the Inherited IRA without penalty any time. (This is why spouses who are widowed before 59.5 take it as an Inherited IRA, and just pay taxes on the withdrawal. I’m not sure if spouses are subject to RMDs or not, although they are waived for 2020.)

When you turn 59.5, you can then have it retitled as your own and then not be subject to RMDs until 72.