Unique situation going forward

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Topic Author
scsu74
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Unique situation going forward

Post by scsu74 » Sat Aug 01, 2020 6:25 pm

So I'm in the process of medically retiring from my current position which will lead to tax free pension distributions for the rest of my life. Also, I will be rolling deferred comp from my current employer over to Vanguard as all my investments are already in Vanguard.

My questions really start with how to handle future investing. I will no longer be able to contribute to my 403/457 accounts so I was thinking about just doing Roth up to the 6k since I will have an effective taxable income of 0. Or will I be prevented from even doing Roth since I'll have an income of 0 for tax purposes?

Additional contributions would be into taxed accounts I'm guessing, but again I'll have an effective taxable income of 0 so will taxable even be that big of a disadvantage?

Does this plan make sense or am I missing something?

Broken Man 1999
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Re: Unique situation going forward

Post by Broken Man 1999 » Sat Aug 01, 2020 6:30 pm

Are you married? If so a spousal IRA might be possible.

Otherwise you could open a taxable account.

Broken Man 1999

ETA: when I was disabled, I also had no access to a 401k any longer. I have lots of unearned income. I bought a VA from Vanguard, and I have enjoyed good growth. My ER all in was .48%, which is no worse than some folks paying even higher ERs in their 401k plans. My $65,500 investment is currently almost $250,000. I have no idea if low ER VAs are available, Vanguard no longer sells annuities. I had already put the max into spousal IRAs, but the limits were/are pretty low. I also stashed a lot of $$$ in I-bonds, that increased my tax-deferred holdings.
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain

Topic Author
scsu74
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Re: Unique situation going forward

Post by scsu74 » Sat Aug 01, 2020 6:53 pm

Broken Man 1999 wrote:
Sat Aug 01, 2020 6:30 pm
Are you married? If so a spousal IRA might be possible.

Otherwise you could open a taxable account.

Broken Man 1999

ETA: when I was disabled, I also had no access to a 401k any longer. I have lots of unearned income. I bought a VA from Vanguard, and I have enjoyed good growth. My ER all in was .48%, which is no worse than some folks paying even higher ERs in their 401k plans. My $65,500 investment is currently almost $250,000. I have no idea if low ER VAs are available, Vanguard no longer sells annuities. I had already put the max into spousal IRAs, but the limits were/are pretty low. I also stashed a lot of $$$ in I-bonds, that increased my tax-deferred holdings.
I am married, but she doesn't work. Would a spousal IRA still be an option?

I have a state based pension, no 401ks. Would a taxable account even be taxable with no income for tax purposes?

000
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Re: Unique situation going forward

Post by 000 » Sat Aug 01, 2020 6:57 pm

In the US taxable accounts are very good for a person with low taxable income. Assuming tax-efficient index funds.

depressed
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Re: Unique situation going forward

Post by depressed » Sat Aug 01, 2020 7:04 pm

scsu74 wrote:
Sat Aug 01, 2020 6:53 pm

I am married, but she doesn't work. Would a spousal IRA still be an option?

I have a state based pension, no 401ks. Would a taxable account even be taxable with no income for tax purposes?
Because neither you nor your wife will have earned income, you will not be eligible to make new contributions to a traditional IRA or to a Roth IRA.

If you currently have a traditional IRA, you may find it beneficial to convert that to a Roth IRA, a little bit each year. In particular, I would suggest converting at least enough to reach the full amount of your standard deduction (which would incur zero income tax). If you currently have funds in a taxable 403/457, then it may also be converted to a Roth of some sort year-by-year. I don't know the full range of options, but in my case, my plan permits me to first convert to a traditional IRA and then to a Roth IRA.

Hope that's some help. Sorry to hear about your medical problems.
Last edited by depressed on Sat Aug 01, 2020 7:08 pm, edited 2 times in total.

Broken Man 1999
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Re: Unique situation going forward

Post by Broken Man 1999 » Sat Aug 01, 2020 7:05 pm

scsu74 wrote:
Sat Aug 01, 2020 6:53 pm
Broken Man 1999 wrote:
Sat Aug 01, 2020 6:30 pm
Are you married? If so a spousal IRA might be possible.

Otherwise you could open a taxable account.

Broken Man 1999

ETA: when I was disabled, I also had no access to a 401k any longer. I have lots of unearned income. I bought a VA from Vanguard, and I have enjoyed good growth. My ER all in was .48%, which is no worse than some folks paying even higher ERs in their 401k plans. My $65,500 investment is currently almost $250,000. I have no idea if low ER VAs are available, Vanguard no longer sells annuities. I had already put the max into spousal IRAs, but the limits were/are pretty low. I also stashed a lot of $$$ in I-bonds, that increased my tax-deferred holdings.
I am married, but she doesn't work. Would a spousal IRA still be an option?

I have a state based pension, no 401ks. Would a taxable account even be taxable with no income for tax purposes?
You need earned income and if your wife isn't working you can't fund a spousal IRA.

A taxable account is taxable, to the degree of your income. Taxes should be low, I would think, since the bulk of your income isn't taxable. You might consider I-bonds for some tax deferral.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain

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badbreath
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Re: Unique situation going forward

Post by badbreath » Sat Aug 01, 2020 10:10 pm


scsu74 wrote

I am married, but she doesn't work. Would a spousal IRA still be an option?

I have a state based pension, no 401ks. Would a taxable account even be taxable with no income for tax purposes?
Because neither you nor your wife will have earned income, you will not be eligible to make new contributions to a traditional IRA or to a Roth IRA.

If you currently have a traditional IRA, you may find it beneficial to convert that to a Roth IRA, a little bit each year. In particular, I would suggest converting at least enough to reach the full amount of your standard deduction (which would incur zero income tax). If you currently have funds in a taxable 403/457, then it may also be converted to a Roth of some sort year-by-year. I don't know the full range of options, but in my case, my plan permits me to first convert to a traditional IRA and then to a Roth IRA.

Hope that's some help. Sorry to hear about your medical problems.
+1 good advice
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

Topic Author
scsu74
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Joined: Thu Dec 26, 2019 11:55 pm

Re: Unique situation going forward

Post by scsu74 » Sat Aug 01, 2020 11:04 pm

000 wrote:
Sat Aug 01, 2020 6:57 pm
In the US taxable accounts are very good for a person with low taxable income. Assuming tax-efficient index funds.
That's the plan! I'm currently 70/20/10. Total US/Total international/total us bond.

Topic Author
scsu74
Posts: 38
Joined: Thu Dec 26, 2019 11:55 pm

Re: Unique situation going forward

Post by scsu74 » Sat Aug 01, 2020 11:08 pm

depressed wrote:
Sat Aug 01, 2020 7:04 pm
scsu74 wrote:
Sat Aug 01, 2020 6:53 pm

I am married, but she doesn't work. Would a spousal IRA still be an option?

I have a state based pension, no 401ks. Would a taxable account even be taxable with no income for tax purposes?
Because neither you nor your wife will have earned income, you will not be eligible to make new contributions to a traditional IRA or to a Roth IRA.

If you currently have a traditional IRA, you may find it beneficial to convert that to a Roth IRA, a little bit each year. In particular, I would suggest converting at least enough to reach the full amount of your standard deduction (which would incur zero income tax). If you currently have funds in a taxable 403/457, then it may also be converted to a Roth of some sort year-by-year. I don't know the full range of options, but in my case, my plan permits me to first convert to a traditional IRA and then to a Roth IRA.

Hope that's some help. Sorry to hear about your medical problems.
Thank you for the info! All of my 403/457 funds are pre-tax so I'll definitely look into how to convert them. I'll have 21 years to convert them as when I hit 55 my pension will be taxed as normal.
Last edited by scsu74 on Sat Aug 01, 2020 11:09 pm, edited 1 time in total.

Topic Author
scsu74
Posts: 38
Joined: Thu Dec 26, 2019 11:55 pm

Re: Unique situation going forward

Post by scsu74 » Sat Aug 01, 2020 11:09 pm

Broken Man 1999 wrote:
Sat Aug 01, 2020 7:05 pm
scsu74 wrote:
Sat Aug 01, 2020 6:53 pm
Broken Man 1999 wrote:
Sat Aug 01, 2020 6:30 pm
Are you married? If so a spousal IRA might be possible.

Otherwise you could open a taxable account.

Broken Man 1999

ETA: when I was disabled, I also had no access to a 401k any longer. I have lots of unearned income. I bought a VA from Vanguard, and I have enjoyed good growth. My ER all in was .48%, which is no worse than some folks paying even higher ERs in their 401k plans. My $65,500 investment is currently almost $250,000. I have no idea if low ER VAs are available, Vanguard no longer sells annuities. I had already put the max into spousal IRAs, but the limits were/are pretty low. I also stashed a lot of $$$ in I-bonds, that increased my tax-deferred holdings.
I am married, but she doesn't work. Would a spousal IRA still be an option?

I have a state based pension, no 401ks. Would a taxable account even be taxable with no income for tax purposes?
You need earned income and if your wife isn't working you can't fund a spousal IRA.

A taxable account is taxable, to the degree of your income. Taxes should be low, I would think, since the bulk of your income isn't taxable. You might consider I-bonds for some tax deferral.

Broken Man 1999
Looks like as long as I stay under 80k in income dividends and capital gains are 0%

lakpr
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Re: Unique situation going forward

Post by lakpr » Sat Aug 01, 2020 11:17 pm

scsu74 wrote:
Sat Aug 01, 2020 11:09 pm
Looks like as long as I stay under 80k in income dividends and capital gains are 0%
No, that is a misunderstanding.

As long as your income PLUS long term capital gains -- you need to hold the taxable investment for at least one year -- plus qualified dividends are less than $104,800 (not $80,000; the standard deduction must be added to it, and if either or both halves of the couple is 65+ years old, add another $1300 for each person older than 65), THEN the tax rate is 0% only on the LTCG + QDIV portion.

The way you phrased it, sounded like if a couple has $75k income and $50k LTCG, the entire $50k will attract zero tax. Not true, hence trying to set it right.

Topic Author
scsu74
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Joined: Thu Dec 26, 2019 11:55 pm

Re: Unique situation going forward

Post by scsu74 » Sun Aug 02, 2020 7:26 am

:arrow:
lakpr wrote:
Sat Aug 01, 2020 11:17 pm
scsu74 wrote:
Sat Aug 01, 2020 11:09 pm
Looks like as long as I stay under 80k in income dividends and capital gains are 0%
No, that is a misunderstanding.

As long as your income PLUS long term capital gains -- you need to hold the taxable investment for at least one year -- plus qualified dividends are less than $104,800 (not $80,000; the standard deduction must be added to it, and if either or both halves of the couple is 65+ years old, add another $1300 for each person older than 65), THEN the tax rate is 0% only on the LTCG + QDIV portion.

The way you phrased it, sounded like if a couple has $75k income and $50k LTCG, the entire $50k will attract zero tax. Not true, hence trying to set it right.
Thank you for the clarification! Wouldn't a taxable account be tax free then until withdrawing as long as you stay under the $104,800?


That leads me into a follow-up question, when do the Roth conversion am I understanding it correctly that as long as I stay under the standard deduction of $24,800, those would be tax free?

My disability income won't count as taxable until I'm 55. It seems like the best route is to roll my 403/457 accounts into traditional and then roll them over to Roth while my earned income is 0. Am I understanding that right?

lakpr
Posts: 5715
Joined: Fri Mar 18, 2011 9:59 am

Re: Unique situation going forward

Post by lakpr » Sun Aug 02, 2020 8:57 am

scsu74 wrote:
Sun Aug 02, 2020 7:26 am
Thank you for the clarification! Wouldn't a taxable account be tax free then until withdrawing as long as you stay under the $104,800?
Well, almost a yes. The assumption is that you will have held the security for at least one full year since you bought it. It is possible, as long as the investments are done after Jan-1-2012 (brokerage firms are required by law to assign Specific ID to all transaction done after that date, including reinvestments of dividends), to sell shares by Specific ID, and thus invoke long term capital gains that are tax free (selling only lots that were purchased more than a year ago).
scsu74 wrote:
Sun Aug 02, 2020 7:26 am
That leads me into a follow-up question, when do the Roth conversion am I understanding it correctly that as long as I stay under the standard deduction of $24,800, those would be tax free?

My disability income won't count as taxable until I'm 55. It seems like the best route is to roll my 403/457 accounts into traditional and then roll them over to Roth while my earned income is 0. Am I understanding that right?
Yes, your understanding is absolutely correct.

I would suggest though, to start with the 403b plan funds first, since there is a restriction of age-55 (if the plan allows) or age 59.5 (IRS rules) if you were to withdraw from the 403b plan. No penalties if you withdraw from 457 plan at any age.

IRAs have the same rule (age 59.5) for withdrawals -- so a rollover from 403b to IRA is a like-for-like transfer in some sense. Roth conversions further have a 5-year rule to be able to tap the money. If you roll over 457 plan funds to IRA then convert, then you will only have locked up the money for 5 years whereas it would have been available on tap for you earlier.

Keep your money in the 457 plan as long as possible, since it will be a great emergency fund that you can tap at will, with only taxes to pay (0% 10% or 12% at most) and NO PENALTIES.

Topic Author
scsu74
Posts: 38
Joined: Thu Dec 26, 2019 11:55 pm

Re: Unique situation going forward

Post by scsu74 » Sun Aug 02, 2020 7:19 pm

lakpr wrote:
Sun Aug 02, 2020 8:57 am
scsu74 wrote:
Sun Aug 02, 2020 7:26 am
Thank you for the clarification! Wouldn't a taxable account be tax free then until withdrawing as long as you stay under the $104,800?
Well, almost a yes. The assumption is that you will have held the security for at least one full year since you bought it. It is possible, as long as the investments are done after Jan-1-2012 (brokerage firms are required by law to assign Specific ID to all transaction done after that date, including reinvestments of dividends), to sell shares by Specific ID, and thus invoke long term capital gains that are tax free (selling only lots that were purchased more than a year ago).
scsu74 wrote:
Sun Aug 02, 2020 7:26 am
That leads me into a follow-up question, when do the Roth conversion am I understanding it correctly that as long as I stay under the standard deduction of $24,800, those would be tax free?

My disability income won't count as taxable until I'm 55. It seems like the best route is to roll my 403/457 accounts into traditional and then roll them over to Roth while my earned income is 0. Am I understanding that right?
Yes, your understanding is absolutely correct.

I would suggest though, to start with the 403b plan funds first, since there is a restriction of age-55 (if the plan allows) or age 59.5 (IRS rules) if you were to withdraw from the 403b plan. No penalties if you withdraw from 457 plan at any age.

IRAs have the same rule (age 59.5) for withdrawals -- so a rollover from 403b to IRA is a like-for-like transfer in some sense. Roth conversions further have a 5-year rule to be able to tap the money. If you roll over 457 plan funds to IRA then convert, then you will only have locked up the money for 5 years whereas it would have been available on tap for you earlier.

Keep your money in the 457 plan as long as possible, since it will be a great emergency fund that you can tap at will, with only taxes to pay (0% 10% or 12% at most) and NO PENALTIES.
Thank you for the detailed reply! So once I seperate I can draw from the 457 even though I'm only 34 without penalty?

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Unique situation going forward

Post by lakpr » Sun Aug 02, 2020 7:21 pm

scsu74 wrote:
Sun Aug 02, 2020 7:19 pm
Thank you for the detailed reply! So once I seperate I can draw from the 457 even though I'm only 34 without penalty?
Yes, that's the beauty of the 457 plans! No age limit, only a willingness to pay taxes is necessary. No penalties.

livesoft
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Re: Unique situation going forward

Post by livesoft » Sun Aug 02, 2020 7:24 pm

More than 40% of US families do not pay any federal income tax. Taxable account investing in a tax-efficient way is not a disadvantage for them.
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Topic Author
scsu74
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Joined: Thu Dec 26, 2019 11:55 pm

Re: Unique situation going forward

Post by scsu74 » Sun Aug 02, 2020 8:22 pm

lakpr wrote:
Sun Aug 02, 2020 7:21 pm
scsu74 wrote:
Sun Aug 02, 2020 7:19 pm
Thank you for the detailed reply! So once I seperate I can draw from the 457 even though I'm only 34 without penalty?
Yes, that's the beauty of the 457 plans! No age limit, only a willingness to pay taxes is necessary. No penalties.
Well that's good news! Wouldn't it still be advantageous to convert to Roth in small amounts to capture the low tax bracket I'll be in until 55? I don't plan on using any of the money as I have taxable accounts as well if needed.

lakpr
Posts: 5715
Joined: Fri Mar 18, 2011 9:59 am

Re: Unique situation going forward

Post by lakpr » Sun Aug 02, 2020 8:32 pm

scsu74 wrote:
Sun Aug 02, 2020 8:22 pm
Well that's good news! Wouldn't it still be advantageous to convert to Roth in small amounts to capture the low tax bracket I'll be in until 55? I don't plan on using any of the money as I have taxable accounts as well if needed.
Start the Roth conversions with the 403b plan funds, as I suggested.
If that's completely converted to Roth, then start converting the 457 plan too. I suggest leaving enough -- about $400k to $500k -- in traditional 457 plan.

Reason for this is that, with this amount in the 457 plan, assuming no other income, a 5% withdrawal rate per year will be just $20k to $25k, that fills out the 0% tax bracket.

No point in paying 10% or 12% taxes if you can avoid that as well.

Topic Author
scsu74
Posts: 38
Joined: Thu Dec 26, 2019 11:55 pm

Re: Unique situation going forward

Post by scsu74 » Mon Aug 03, 2020 8:42 am

lakpr wrote:
Sun Aug 02, 2020 8:32 pm
scsu74 wrote:
Sun Aug 02, 2020 8:22 pm
Well that's good news! Wouldn't it still be advantageous to convert to Roth in small amounts to capture the low tax bracket I'll be in until 55? I don't plan on using any of the money as I have taxable accounts as well if needed.
Start the Roth conversions with the 403b plan funds, as I suggested.
If that's completely converted to Roth, then start converting the 457 plan too. I suggest leaving enough -- about $400k to $500k -- in traditional 457 plan.

Reason for this is that, with this amount in the 457 plan, assuming no other income, a 5% withdrawal rate per year will be just $20k to $25k, that fills out the 0% tax bracket.

No point in paying 10% or 12% taxes if you can avoid that as well.
That's a good point, I guess I could look at it more like a back-up emergency fund. My only hold-up is I won't be in a low tax bracket after 55 and I highly doubt I'll need any of the 403/457 money before then. After 55 my pension becomes taxable, I also would think I'd have another career established by then which would also be taxable, so when I withdraw the 457 funds at that time it would be back in my normal 30% (with state) effective tax bracket. If I convert it all now I wouldn't have to worry, since it would be tax free withdrawals. I only have 80k in my 457 and 10k in my 403 so it's not a huge amount like you mentioned.

Going forward, would a solo 401k make the most sense since I won't be able to contribute to 403/457? I'm planning on investing in rental properties as a source of income in addition to my pension.

lakpr
Posts: 5715
Joined: Fri Mar 18, 2011 9:59 am

Re: Unique situation going forward

Post by lakpr » Mon Aug 03, 2020 9:03 am

scsu74 wrote:
Mon Aug 03, 2020 8:42 am
That's a good point, I guess I could look at it more like a back-up emergency fund. My only hold-up is I won't be in a low tax bracket after 55 and I highly doubt I'll need any of the 403/457 money before then. After 55 my pension becomes taxable, I also would think I'd have another career established by then which would also be taxable, so when I withdraw the 457 funds at that time it would be back in my normal 30% (with state) effective tax bracket. If I convert it all now I wouldn't have to worry, since it would be tax free withdrawals. I only have 80k in my 457 and 10k in my 403 so it's not a huge amount like you mentioned.

Going forward, would a solo 401k make the most sense since I won't be able to contribute to 403/457? I'm planning on investing in rental properties as a source of income in addition to my pension.
Do you expect to be on disability for the next 3 to 4 years at least, then? In that case, converting both the 403b and 457 plans together to Roth, up to the standard deduction limit annually, makes most sense as you would then owe zero tax.

Regarding the Solo 401k, rental income is considered passive income, not earned income, hence cannot be used to contribute to either IRA or Solo-401k. The income must be "sweat-off-the-brow" type, for you to use it for contributions to any type of retirement plan. But since you will be in the 0% long-term capital gains tax bracket, you can invest in taxable for almost the same tax treatment (just remember to keep income + long-term capital gains below $104,800)

Topic Author
scsu74
Posts: 38
Joined: Thu Dec 26, 2019 11:55 pm

Re: Unique situation going forward

Post by scsu74 » Tue Aug 04, 2020 5:11 pm

:arrow:
lakpr wrote:
Mon Aug 03, 2020 9:03 am
scsu74 wrote:
Mon Aug 03, 2020 8:42 am
That's a good point, I guess I could look at it more like a back-up emergency fund. My only hold-up is I won't be in a low tax bracket after 55 and I highly doubt I'll need any of the 403/457 money before then. After 55 my pension becomes taxable, I also would think I'd have another career established by then which would also be taxable, so when I withdraw the 457 funds at that time it would be back in my normal 30% (with state) effective tax bracket. If I convert it all now I wouldn't have to worry, since it would be tax free withdrawals. I only have 80k in my 457 and 10k in my 403 so it's not a huge amount like you mentioned.

Going forward, would a solo 401k make the most sense since I won't be able to contribute to 403/457? I'm planning on investing in rental properties as a source of income in addition to my pension.
Do you expect to be on disability for the next 3 to 4 years at least, then? In that case, converting both the 403b and 457 plans together to Roth, up to the standard deduction limit annually, makes most sense as you would then owe zero tax.

Regarding the Solo 401k, rental income is considered passive income, not earned income, hence cannot be used to contribute to either IRA or Solo-401k. The income must be "sweat-off-the-brow" type, for you to use it for contributions to any type of retirement plan. But since you will be in the 0% long-term capital gains tax bracket, you can invest in taxable for almost the same tax treatment (just remember to keep income + long-term capital gains below $104,800)
I'll be receiving the payments the rest of my life, they're just tax free for the next 21 years.

I'll have an income cap of 60k for those 21 years before I start taking a penalty on the benefit. So I'm trying to think of a new career like rental income or self-employment of some kind. I'd like to avoid a W2.

I wouldn't be able to do Roth in a taxable account though. Is there a minimum income where the solo 401k opens? Could always buy properties with business owned by wife and have her pay me a salary or something.

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