Can Traditional IRA or 401K dollars remain completely tax free?

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Maven
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Can Traditional IRA or 401K dollars remain completely tax free?

Post by Maven » Wed Sep 11, 2019 11:05 am

Can $1 invested in a Traditional account remain completely tax free? Example: In retirement you withdraw the amount to cover the standard deduction from your Traditional IRA or 401K. So for today's tax law you could avoid tax on that $24,400? Assuming you follow all withdrawal rules.

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TomatoTomahto
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by TomatoTomahto » Wed Sep 11, 2019 11:09 am

Maven wrote:
Wed Sep 11, 2019 11:05 am
Can $1 invested in a Traditional account remain completely tax free? Example: In retirement you withdraw the amount to cover the standard deduction from your Traditional IRA or 401K. So for today's tax law you could avoid tax on that $24,400? Assuming you follow all withdrawal rules.
As long as your account balance is low enough, and/or you die soon enough, and/or your other income is low enough, and/or tax law doesn’t change.
Okay, I get it; I won't be political or controversial. The Earth is flat.

sport
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by sport » Wed Sep 11, 2019 11:47 am

Once you reach the age of 70.5, you can make Qualified Charitable Distributions (QCD) from a TIRA. These are donations to qualified charities and the distributions are completely tax free up to 100K per year.

sjt
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by sjt » Wed Sep 11, 2019 11:51 am

Maven wrote:
Wed Sep 11, 2019 11:05 am
Can $1 invested in a Traditional account remain completely tax free? Example: In retirement you withdraw the amount to cover the standard deduction from your Traditional IRA or 401K. So for today's tax law you could avoid tax on that $24,400? Assuming you follow all withdrawal rules.
Sure, and then on top of that, you can sell funds from a taxable account and pay 0% on the capital gains up to a certain point. Don't forget about state tax which may or may not have brackets in your state.
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

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FiveK
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by FiveK » Wed Sep 11, 2019 12:02 pm

Maven wrote:
Wed Sep 11, 2019 11:05 am
So for today's tax law you could avoid tax on that $24,400?
Perhaps repetitious, but (other than sport's QCD strategy) this is true only if you have $0 other ordinary income (e.g., $0 interest from savings and checking, less than $15K SS benefits, etc.).

In other words, there is nothing special about the taxation of those withdrawals: they are treated as ordinary income, the same as any other ordinary income.

JustinR
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by JustinR » Wed Sep 11, 2019 2:55 pm

Maven wrote:
Wed Sep 11, 2019 11:05 am
Can $1 invested in a Traditional account remain completely tax free? Example: In retirement you withdraw the amount to cover the standard deduction from your Traditional IRA or 401K. So for today's tax law you could avoid tax on that $24,400? Assuming you follow all withdrawal rules.
Yes, and you can withdraw it tax free and penalty free before retirement age too. One of the perks of traditional over Roth. Look up "Roth conversion ladder"

retiredjg
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by retiredjg » Wed Sep 11, 2019 3:08 pm

Maven wrote:
Wed Sep 11, 2019 11:05 am
Can $1 invested in a Traditional account remain completely tax free? Example: In retirement you withdraw the amount to cover the standard deduction from your Traditional IRA or 401K. So for today's tax law you could avoid tax on that $24,400? Assuming you follow all withdrawal rules.
Your example works. Another way to do this is have medical bills large enough to be able to deduct them.

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Maven
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by Maven » Wed Sep 11, 2019 3:12 pm

Thank you all for the responses. I always thought HSA dollars were the only dollars that could be entirely tax free when used correctly. But it seems that given certain circumstances, TRAD contributions may also apply.

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FIREchief
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by FIREchief » Wed Sep 11, 2019 6:15 pm

retiredjg wrote:
Wed Sep 11, 2019 3:08 pm
Maven wrote:
Wed Sep 11, 2019 11:05 am
Can $1 invested in a Traditional account remain completely tax free? Example: In retirement you withdraw the amount to cover the standard deduction from your Traditional IRA or 401K. So for today's tax law you could avoid tax on that $24,400? Assuming you follow all withdrawal rules.
Your example works. Another way to do this is have medical bills large enough to be able to deduct them.
This is a good point, and one of the arguments against Roth converting all tIRA assets. IIRC, SNF expenses are qualified medical expenses, so an "easy" way to surpass the 10% threshold and avoid ever paying taxes on the tIRA $$$.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.


kaneohe
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by kaneohe » Wed Sep 11, 2019 6:45 pm

retiredjg wrote:
Wed Sep 11, 2019 6:33 pm
SNF? :|
google? https://www.google.com/search?q=snf&oq= ... e&ie=UTF-8

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FiveK
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by FiveK » Wed Sep 11, 2019 6:45 pm

retiredjg wrote:
Wed Sep 11, 2019 6:33 pm
SNF? :|
Skilled Nursing Facility?

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Maven
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by Maven » Wed Sep 11, 2019 6:51 pm

Would there be a minimum recommended amount to maintain in traditional accounts for these purposes? I realize that would be a complete estimate but worth considering.

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GerryL
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by GerryL » Wed Sep 11, 2019 6:53 pm

Maven wrote:
Wed Sep 11, 2019 3:12 pm
Thank you all for the responses. I always thought HSA dollars were the only dollars that could be entirely tax free when used correctly. But it seems that given certain circumstances, TRAD contributions may also apply.
Good news, bad news:
I don’t have to pay taxes because my income is so low.

Bad news, good news:
I have to pay a lot of taxes because my income is so high.

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Maven
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by Maven » Wed Sep 11, 2019 7:10 pm

GerryL wrote:
Wed Sep 11, 2019 6:53 pm
Maven wrote:
Wed Sep 11, 2019 3:12 pm
Thank you all for the responses. I always thought HSA dollars were the only dollars that could be entirely tax free when used correctly. But it seems that given certain circumstances, TRAD contributions may also apply.
Good news, bad news:
I don’t have to pay taxes because my income is so low.

Bad news, good news:
I have to pay a lot of taxes because my income is so high.
Understood. My income isn't "so low" but it also isn't "so high".

Silk McCue
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by Silk McCue » Wed Sep 11, 2019 7:21 pm

Maven wrote:
Wed Sep 11, 2019 6:51 pm
Would there be a minimum recommended amount to maintain in traditional accounts for these purposes? I realize that would be a complete estimate but worth considering.
It’s all very personal based upon others sources of income including Pensions and Social Security. I have modeled ours to include leaving enough in tax deferred after spending down and continuing to perform Roth Conversions up to age 70 such that remaining Tax deferred funds will be fulling consumed via QCD’s into our late 80s with no taxes ever paid on those funds while Roth’s grow unhindered.

You will need to do your own analysis to determine what will work for you.

Cheers

pdavi21
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by pdavi21 » Wed Sep 11, 2019 8:19 pm

Yes. There is a minimum amount of trad for everyone. Statistically, a person is very likely to pay less marginal tax at some point in their life in the future. Contributing trad now and converting to ROTH at that time (if/when it comes) is advantageous.

Conversions from ROTH to traditional also are not possible. As such, you can never recoup the losses of predicting a higher tax rate in the future (if you are wrong).

Contributing to both ROTH and trad accounts is a form of diversification. The cost of diversification is potentially failing to optimize taxes.

EDIT: Considering you can only do 24k (minus NQDI) per year, the "minimum" is probably in the 100ks or less. I have resolved to aim for under 300k in my trad accounts (unless I pop into the 22% tax bracket). I can go up into the 10% bracket or even 12%, hopefully without state tax, if necessary.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

retiredjg
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by retiredjg » Thu Sep 12, 2019 6:14 am

Maven wrote:
Wed Sep 11, 2019 6:51 pm
Would there be a minimum recommended amount to maintain in traditional accounts for these purposes? I realize that would be a complete estimate but worth considering.
A WAG....if the cost of a nursing home is $50k to $100k a year, maybe 200k per person is a number to start with. I probably would not want more than $400k left in traditional if I had the time and ability to convert it all.

cherijoh
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by cherijoh » Thu Sep 12, 2019 6:47 am

sport wrote:
Wed Sep 11, 2019 11:47 am
Once you reach the age of 70.5, you can make Qualified Charitable Distributions (QCD) from a TIRA. These are donations to qualified charities and the distributions are completely tax free up to 100K per year.
Of course this only works if you have no need to spend the money to cover expenses or if you would have been making that same donation from another pot of money anyway.

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David Jay
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Re: Can Traditional IRA or 401K dollars remain completely tax free?

Post by David Jay » Thu Sep 12, 2019 8:01 am

Maven wrote:
Wed Sep 11, 2019 11:05 am
Can $1 invested in a Traditional account remain completely tax free? Example: In retirement you withdraw the amount to cover the standard deduction from your Traditional IRA or 401K. So for today's tax law you could avoid tax on that $24,400? Assuming you follow all withdrawal rules.
Here ya’ go, my post on tax-free Roth conversions: https://bogleheads.org/forum/viewtopic. ... 0&t=237277
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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