IRA distribution plan to avoid SS penalty

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

IRA distribution plan to avoid SS penalty

Post by prentis » Mon Apr 28, 2008 7:13 pm

I have been saving all my working life. Sometime in the near future I will be in the distribution phase of my investing career and this is new territory for me. It has started to dawn on me that infrequent large planned expenditures like car replacements, new roof, weddings and the like will come out of my IRA and will be taxed as straight income. That part I understand. What is difficult for me is to assess the impact on SS payments, were I to make larger than normal distributions in any one tax year. Here is my situation:

Age 65, married, retired
Delaying SS until 70, wife until 66 (we are 4 years apart in age)
$3/4 Mil in Vanguard (spread Coffeehouse-ish)
Roughly $50K annual pension, non-COLA
$30K in Money Market
No debt, no mortgage,
Wife and I spending $70K or so per year including all insurances.
25% tax bracket

Would it make sense to increase my distributions during the 4-5 years previous to starting SS payments, pay the income tax, invest the money in taxable accounts to have for large outlays, thereby minimizing the potential for penalizing/reducing SS payments? Or not?

Maybe you folks can help me figure out how to calculate the tradeoff.

Thanks in advance
A good landing is one that you can walk away from.

retired at 48
Posts: 1726
Joined: Tue Jan 15, 2008 7:09 pm
Location: Saratoga NY; Port Saint Lucie, FL

Post by retired at 48 » Mon Apr 28, 2008 7:30 pm

Couple of questions. Is the $3/4MM in Vanguard in an IRA? Is someone still working? What gets you into the 25% tax bracket with only your 50K pension? Other income?

R48

mikenz
Posts: 780
Joined: Sat Mar 10, 2007 8:33 pm

Post by mikenz » Mon Apr 28, 2008 7:42 pm

Firstly, congratulations. I'd happily swap with you and pay whatever your taxes might be! Hope I'm in that good a shape when I get to 65.

The only way I can solve these things is with a spreadsheet, something like:

Column A: age, starting with 65, 66, 67
Column B: pension, in real dollars, so decreasing by 3% per year (non COLA)
Column C: social security income - $0 until age 70 - in real dollars
Column D: expenses in real dollars = 70K fixed
Column E: shortfall
Column F: withdrawal from IRA required - will increase as pension decreases
Column G: IRA balance (say add real return of 4% per year, less withdrawals)
Column H: taxable account balance
Column I: est. taxes on previous income columns

Then I'd play with making additional IRA withdrawals in the early years and see how it works out.

The other way is just get a rough figure of what taxes you'd pay in year 1 vs. est. taxes you'd pay after SS kicks in. Depending on what the difference is, yes I would expect you could benefit from doing as you suggest in the first 5 years.

tomd37
Posts: 2886
Joined: Thu Mar 01, 2007 10:39 pm
Location: Middle Tennessee

Post by tomd37 » Mon Apr 28, 2008 8:01 pm

With $50K in pension you are going to pay tax on 85% on your SS benefits (under current rules) regardless of when you start taking those benefits. :( Large withdrawals from your IRA for special events isn't going to change the amount of SS benefits subject to taxation. You've already reached that situation with your pension.
Tom D.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Mon Apr 28, 2008 8:46 pm

retired at 48 wrote:Couple of questions. Is the $3/4MM in Vanguard in an IRA? Is someone still working? What gets you into the 25% tax bracket with only your 50K pension? Other income?

R48
Yes, Vanguard IRA (from two rolled over 401Ks).

The 25% bracket comes partly from my wife working very part time bringing in about $12K per year. Plus for the past three years (I retired at 63) I have been receiving about $20K in deferred compensation from my last employer (1/3 of it each year). That is paid out now. My wife will probably retire soon as well. Hence I will be starting to dip into the IRA in the next couple of years.
A good landing is one that you can walk away from.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Mon Apr 28, 2008 8:50 pm

tomd37 wrote:With $50K in pension you are going to pay tax on 85% on your SS benefits (under current rules) regardless of when you start taking those benefits. :( Large withdrawals from your IRA for special events isn't going to change the amount of SS benefits subject to taxation. You've already reached that situation with your pension.
Bingo! So I assume "mikenz"'s calculations are moot? (Thanks mikenz. I appreciate what you put together).
A good landing is one that you can walk away from.

mikenz
Posts: 780
Joined: Sat Mar 10, 2007 8:33 pm

Post by mikenz » Mon Apr 28, 2008 9:37 pm

At least you've saved yourself the trouble of trying to put together that spreadsheet!

It might be worth trying anyway. I have quite a bit of taxable investments, and played around with what sort of taxes I'd pay withdrawing various amounts from taxable and IRAs, and possibly doing Roth conversions in the early years, etc. and you can learn a lot from doing it.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

I apparently asked the wrong question

Post by prentis » Mon Apr 28, 2008 9:56 pm

Thanks all for your attention to my question.

Now that I understand the ramifications of taxable SS (thanks for setting me straight on that. It would have hit me eventually) the remaining question has everything to do with how to pace IRA withdrawals to minimize overall tax impact. Mikenz, your spread should help in that endeavor.

On the face of it I would expect that forward planning and a smoothing of annual withdrawals would win over waiting for the big bills and yanking a wad out in a single year, thereby triggering a higher tax bracket. I shall see.

I've always said, we Bogleheads don't so much need investment advise as we need a tax expert. In one way or another taxes drive about every subject on this forum (off topic not withstanding).

Thanks again everyone.
A good landing is one that you can walk away from.

retired at 48
Posts: 1726
Joined: Tue Jan 15, 2008 7:09 pm
Location: Saratoga NY; Port Saint Lucie, FL

Post by retired at 48 » Mon Apr 28, 2008 10:35 pm

Hi prentis...thanks for add'l info. Since you are debt free, you may be averse to taking on any debt. But here is some creative financing I do (age 63) to enable converting some of my (similar) regular IRA to a Roth IRA.

Since you are delaying taking social security until age 70, and since at age 70 1/2 you will have to start Required Minimum Distributions from your regular IRA, your income will increase greatly then (ss + pension + RMDs). Converting to a Roth IRA, now, will lessen your taxable RMD's in the future. Here's what I'm doing.

First, I took out a home equity loan (P - 3/4%) on my primary residence. My income has been soc. sec. plus withdrawals from a regular IRA. Rather than make those withdrawals to live, I now tap the HELOC for my needs. This creates income tax space through the 15% bracket, allowing me to convert monies to a Roth IRA, paying the lower 15% tax rate. The Roth lowers future RMD,s and can be used for tax free one time future withdrawals if needed. And Roths make great inherited IRAs.

A somewhat more detailed discussion can be found in a posting on this forum titled "First Time Posters IRA @ $1,000,000: Shares Wisdom Learned"...page 3.

For your consideration....retired at 48

heyyou
Posts: 3198
Joined: Tue Feb 20, 2007 4:58 pm

Post by heyyou » Mon Apr 28, 2008 10:56 pm

Tax-deferred retirement savings was based on the concept that the gov't would eventually get their taxes. You may as well think of your traditional IRA as 75% yours and 25% Uncle Sam's. You've just been the custodian of those taxes for the last 20 years.

When Scott Burns wrote about your situation, he called it the "torpedo tax," since the tax on IRA withdrawals plus the additional tax on SS for each dollar of WD was a major % of the WD.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Born too soon

Post by prentis » Mon Apr 28, 2008 11:22 pm

I was just born too soon, I guess. Roth IRAs came in just about the time I found myself double dipping with one retirement pension income, and another good paying job, from which I finally retired. During that time the combined income disqualified me from participation. I am well aware of the gotch'chas ahead in my case. But I'll take comfort with minenz's comment, he would swap my situation with his, whatever the taxes. I played the cards I was dealt.

Hey, retired at 48, what an interesting ploy! I see where that is coming from. But based on the above considering my pension coming in which I can't control I think I am still stuck with most of the SS being taxable. Isn't that correct? Also, 5 years of conversion to ROTHs with the maximum contribution limitation I'm thinking wouldn't make much of a dent in my RMD at 70-1/2 +.

But I'm shooting from the hip. I'll look into the link you provided and see what I can pick up from that.

Fundamentally you are correct, I really like owning my home free and clear, particularly with what is going on today. Beats Lunestra.
A good landing is one that you can walk away from.

User avatar
celia
Posts: 8617
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Post by celia » Mon Apr 28, 2008 11:47 pm

The way I look at it, you're going to pay the same taxes on tax-deferred IRA withdrawals whether you put the withdrawn money in a taxable account or a Roth IRA. It's a no-brainer to put it into a Roth. (The Roth account needs to be open 5 years and you need to be over 59 1/2 to make withdrawals without penalty.)

For the last year or so, I've realized I'm going to be in a higher tax bracket in retirement and am trying to figure out how/how much traditional IRA to pull out/convert to a Roth IRA so I don't get hit by as large a Required Minimum Distribution. When we start to collect SS, I don't think there's any way we can have less (or more!) than 85% of our SS taxed. So I'm trying to think of it as 15% of our SS will be tax-free.

Of course, the tax laws could change in a new administration.

retired at 48
Posts: 1726
Joined: Tue Jan 15, 2008 7:09 pm
Location: Saratoga NY; Port Saint Lucie, FL

Re: Born too soon

Post by retired at 48 » Mon Apr 28, 2008 11:47 pm

prentis wrote: Hey, retired at 48, what an interesting ploy! I see where that is coming from. But based on the above considering my pension coming in which I can't control I think I am still stuck with most of the SS being taxable. Isn't that correct? Also, 5 years of conversion to ROTHs with the maximum contribution limitation I'm thinking wouldn't make much of a dent in my RMD at 70-1/2 +.

But I'm shooting from the hip. I'll look into the link you provided and see what I can pick up from that.

Fundamentally you are correct, I really like owning my home free and clear, particularly with what is going on today. Beats Lunestra.
Yes, your social security will be taxable, but at age 70 when you start. In the meantime, the 15% tax bracket space is through $65K TAXABLE income. Given your deductions and exemptions, this means you should be able to convert about $35,000 annually to Roth (85 - 50K) for about four straight years. Not exactly peanuts, getting this out of your regular IRA.

Yours to ponder...R48

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Ponder I will

Post by prentis » Tue Apr 29, 2008 12:19 am

Ponder I will.

But pardon my ignorance...how can you put $35K into a ROTH when I understand the limit for contribution for 2008 for those over 50 is $8K? What am I missing?
A good landing is one that you can walk away from.

livesoft
Posts: 63093
Joined: Thu Mar 01, 2007 8:00 pm

Post by livesoft » Tue Apr 29, 2008 12:43 am

prentis, there is a difference between contributing to a Roth IRA and converting an existing IRA to a Roth IRA.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Back to pondering

Post by prentis » Tue Apr 29, 2008 12:49 am

Doh! Of course. Thank you. Back to pondering.
A good landing is one that you can walk away from.

allancoleman
Posts: 406
Joined: Tue Sep 11, 2007 9:00 pm
Location: Alaska & Hawaii

Post by allancoleman » Tue Apr 29, 2008 12:51 am

What you are missing , prentis , is that retired at 48 is talking about Roth " conversions " and not Roth " contributions " .

My Roth conversion last year was $80k which has been my least amount done since Roth conversions were first allowed years ago . I now have almost Flagship status in the amount of Roth conversions I've done .

Most of my Roth conversions were done in the 25% marginal tax bracket and some have been as much as $120k to $125k with effective tax rates ranging from as much as 22% to 13% last year .

For more information on Roths , visit :

http://www.rothira.com

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

More to ponder

Post by prentis » Tue Apr 29, 2008 1:05 am

Even more to ponder. I guess I have some homework to do. Thanks for the link. It looks like a gold mine of information.
A good landing is one that you can walk away from.

allancoleman
Posts: 406
Joined: Tue Sep 11, 2007 9:00 pm
Location: Alaska & Hawaii

Post by allancoleman » Tue Apr 29, 2008 1:55 am

There is also an excellent message board link ( http://benefitslink.com/boards/index.php?showforum=18 ) on the left hand margin of the Roth web page link , prentis . Most of the people who answer questions on that board are professionals like CPAs and such . I visit there frequently to learn more about taxfree forever Roths .

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Thank you once again

Post by prentis » Tue Apr 29, 2008 9:58 am

allancoleman, et.al.,

Thank you once again. This is why I joined this forum. Voices of experience...people helping people...advise independent of profit motive (if you get my drift).
A good landing is one that you can walk away from.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Tue Apr 29, 2008 10:29 am

allancoleman wrote:What you are missing , prentis , is that retired at 48 is talking about Roth " conversions " and not Roth " contributions " .

My Roth conversion last year was $80k which has been my least amount done since Roth conversions were first allowed years ago . I now have almost Flagship status in the amount of Roth conversions I've done .

Most of my Roth conversions were done in the 25% marginal tax bracket and some have been as much as $120k to $125k with effective tax rates ranging from as much as 22% to 13% last year .

For more information on Roths , visit :

http://www.rothira.com
Allancoleman,

I have dug around in some of the links provided including some Vanguard calculators on the convert/don't convert decision and the reason to do so isn't obvious. Many scenarios in my situation come out as a wash. What has been your rationale/benefit for doing what you are doing?
A good landing is one that you can walk away from.

allancoleman
Posts: 406
Joined: Tue Sep 11, 2007 9:00 pm
Location: Alaska & Hawaii

Post by allancoleman » Tue Apr 29, 2008 10:58 am

My rationale / benefit , prentis , for starting my Roth conversion strategy when they were first authorized years ago when we were allowed to convert and pay the taxes over the next four calendar tax years was my realization that I would probably be in a higher marginal tax bracket in retirement that I was in employment and that my RMD would also probably keep me in the highest marginal tax bracket forever age after age 70 because of the growth of my deferred accounts .

I don't use Roth conversion tables on most web sites because it's pretty much common sense whether you should do Roth conversions or not . Determining factors are if you think you'll be in a higher marginal tax bracket in retirement than you are now , what your RMD , required minimum distribution , will or might be at age 70 , and whether you have enough " outside dollars " to pay the taxes due on your Roth conversion . Very few studies advise using money inside your deferred accounts such as your IRA or 401(k) to pay the taxes on the Roth conversion amount .

It's a guessing game , prentis , but now after having accomplished the Roth conversions I've done in the past and will do in the future and realizing what our future taxes will probably be under a different administration , I'm very glad I've done them . Every calendar year that goes by without doing a Roth conversion is a year lost forever and another year that goes by while your deferred accounts continue to grow along with your tax bill when RMD finally hits . All my Roth money is taxfree forever under currect tax code and will be my last money spent in retirement after all my deferred accounts are depleted through distributions or RMD .

Right now approximately a third of my invested assets are in taxfree forever Roths and I expect approximately half will be by the time I reach age 70 when RMD kick in and then I'll take a look at my RMD at that time and see if I'll continue to do more Roth conversions . Recent studies by AAII suggest that even individuals after RMD age of 70 can benefit from Roth conversions but once again it's up to each individual to determine that for themselves .

IRS publication 590 is really your bible in all this too . They have all the Roth regulations and RMD tables there . My TurboTax also assists me in my planning . Most people don't plan to fail , they just fail to plan . One of the most important things an individual can do is think ahead and be where the puck is going to be .

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Tue Apr 29, 2008 11:22 am

allancoleman wrote:Determining factors are if you think you'll be in a higher marginal tax bracket in retirement than you are now , what your RMD , required minimum distribution will or might be at age 70 , and whether you have enough " outside dollars " to pay the taxes due on your Roth conversion . Very few studies advise using money inside your deferred accounts such as your IRA or 401(k) to pay the taxes on the Roth conversion amount .
I can see a "what if" spread sheet in my immediate future.

However, I probably resemble your final point about paying tax from the conversion. I'm feeling dense but why do you think that is? The same would be true for simple IRA distributions would it not? My taxes would have to be paid out of a distribution.

Let me guess. Converting money from the simple IRA to a ROTH and paying the tax through a distribution from the simple IRA, leaves less overall in the deferred investment stream. But in your example where did the "outside" money come from? Shouldn't it too be making interest rather than handed over to Uncle Sam?

My brain hurts.
A good landing is one that you can walk away from.

Mitchell777
Posts: 1033
Joined: Mon May 21, 2007 6:32 am

Prentis

Post by Mitchell777 » Tue Apr 29, 2008 11:47 am

Just a question regarding collecting SS at 70. I've pondered when to collect although I'm not there yet. Wondering why you decided to wait until 70. Based on your pension, your portfolio, and your spending, it appears you will never be in the slightest fear of running out of money. If you have heirs, you could live off the pension and SS now and allow the investments to grow. You can pass the investments on to heirs but not the SS or pension. I guess the same applies if there are no heirs but charities instead. Just curious as to your thinking. Thanks in advance

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Delaying SS

Post by prentis » Tue Apr 29, 2008 12:15 pm

Hi Mitchell777,

This is about the third morph of subject in this thread, but hey, that is what makes this forum interesting.

The delaying rationale treats the increase in SS payments like buying an annuity at bargain basement prices. This is explained in detail at:

www.analyzenow.com

Go to "Helpful Articles," "Social Security." Many good articles there.

It assumes, of course, that you can function until 70 without SS payments. It also assumes that SS will still be viable when you reach 70. If for you that is a few years out it is probably a safe assumption. If it is many years away it is a gamble.

(Edit) It also sort of fits with the original subject of this thread. During the years of no SS, the IRA is tapped for living expenses, thereby lowering the IRA value and upcoming Required Minimum Distribution after 70 and a half. The higher SS more than compensates. (end Edit)

Hope this answers your question.

For the record, we plan to spend our kid's inheritance and charities are getting theirs along the way.
Last edited by prentis on Tue Apr 29, 2008 1:58 pm, edited 1 time in total.
A good landing is one that you can walk away from.

allancoleman
Posts: 406
Joined: Tue Sep 11, 2007 9:00 pm
Location: Alaska & Hawaii

Post by allancoleman » Tue Apr 29, 2008 12:33 pm

My " outside money " , prentis , came from on going liquidation of another leg of my retirement portfolio , personally owned real estate with zero debt aquired decades ago at pennies on the dollar now with current sale prices .

Rather than start a whole nother discussion on whether it's O.K. to use money inside your deferred accounts to pay the taxes on Roth conversions , the vast majority of the studies done by most experts suggest it's not economical wise accept in very rare individual circumstances .

Suggest you do quite a bit of reading of IRS publication 590 , ALL the Roth web site links , and do a lot of personal planning of your own individual situation . I'm just giving you what I've learned over the many years I've done Roth conversions and studies I've read not only from AAII but many other Roth articles over the years .

General Roth conversion rules are :

Expected higher income tax bracket in retirement .

Outside dollars to pay the tax bill .

Attempt to do the Roth conversions in the lowest tax bracket possible .

I just happened to do most of my Roth conversions in the 25% marginal income tax bracket because I had massive amounts in my deferred accounts I had to remove from future RMD calculations later at age 70 . Yes , sometimes too much money can be a problem too . :)

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Tue Apr 29, 2008 1:21 pm

allancoleman wrote:Suggest you do quite a bit of reading of IRS publication 590 , ALL the Roth web site links , and do a lot of personal planning of your own individual situation .

Yes , sometimes too much money can be a problem too . :)
I'll make a point of it. Predicting the outcome, I think I will just have to take my lumps. In my situation most of my IRA money went in at the 28% marginal tax rate so I should enjoy a little tax benefit at least.

Unlike "retired at 48"'s "$1,000,000: Shares Wisdom Learned" I didn't get into any appreciable understanding about investing until late in my career. I just doggedly plugged in 12 to 15% into my company 401K for years on end. I most likely would have done wildly much better by doing some of what 48 did along the way but at least I am where I am. I am probably typical of those who pay into their company retirement funds but am atypical of the general public, it seems. Most aren't even joining the plans.

Too much money a problem? In more ways than one.
Last edited by prentis on Fri May 02, 2008 2:31 pm, edited 1 time in total.
A good landing is one that you can walk away from.

Mitchell777
Posts: 1033
Joined: Mon May 21, 2007 6:32 am

Delaying SS

Post by Mitchell777 » Tue Apr 29, 2008 2:23 pm

Prentis - Thanks for the info. Very interesting. I never thought about it that way. It really is true that the most complex decision is not how or where to invest, but tax considerations

JMahaney
Posts: 16
Joined: Fri Sep 21, 2007 5:38 pm

I disagree

Post by JMahaney » Tue Apr 29, 2008 2:26 pm

The taxes on SS are indeed avoidable to a point

It is not correct to say that Prentis' 50k means his the maximum of 85% of his SS will be taxed.

[quote]With $50K in pension you are going to pay tax on 85% on your SS benefits (under current rules) regardless of when you start taking those benefits. :( Large withdrawals from your IRA for special events isn't going to change the amount of SS benefits subject to taxation. You've already reached that situation with your pension."

This is a false statement and one that I have mentioned before..This is a big reason why delaying SS can be powerful...The taxation of 85% of SS occurs based on the lesser of three tests...Let's assume that Prentis had $50,000 of SS between himself and his wife. You are assuming that $42,500 os the SS would be taxable but that is a false leap. Let’s assume that he only takes the pension and the SS at age 70.

The test that would apply is 50% over first threshold ($32,000) + 35% over the second threshold ($44,000). His combined income if he had only the pension and SS would be $75,000 ($50,000 + (.50*50,000). The formula would say that $32,350 of his SS was taxable ([{75,000 – 32,000}*.5}+[{75,000-44,000}*.35].

If you assume a 30% federal and state tax marginal rate on that $10,150 difference, we are talking about $3,000 per year.

allancoleman
Posts: 406
Joined: Tue Sep 11, 2007 9:00 pm
Location: Alaska & Hawaii

Post by allancoleman » Tue Apr 29, 2008 4:28 pm

Common sense , prentis , would tell you that if you used money " inside " your deferred accounts to pay the tax and even if you converted it in the 25% marginal income tax bracket and lived in one of many high income tax states with upwards of almost a 10% state income tax , you would TRASH one third of your deferred account to pay the taxes on your Roth conversion . In a higher tax bracket , you could easily trash half , especially with the increased income tax brackets some presidential contenders are talking about going forward . You can see why I'm just as glad to have a good portion of my Roth conversions behind me .

Even if you managed to convert in the 15% marginal income tax bracket and were dumb enough to do the Roth conversion in one of these afore mentioned robber income tax states , you'd still trash a quarter of your deferred account to pay the taxes on your Roth conversion .

And if you're not well north of several millions in your deferred account , it don't make sense to do any Roth conversions in any tax bracket . For example :

First RMD on a $ million = $36,496.35
First RMD on two $ million = $72,992.70

Neither likely to break your bank or be worth the taxes paid on a conversion .

First RMD on three $ million = $109,489.05

Now my eyes are beginning to open on this RMD stuff .

First RMD on four $ million = $145,985.40
First RMD on five $ million = $182,2481.75
First RMD on six $ million = $218,978.81

And so on and now we're talking real money paid in taxes even on a RMD schedule much less add your Social Security and other retirement income . You can easily see with some big bucks in your deferred accounts how you could be stuck in the highest income tax bracket forever when RMDs hit especially if you have any kind of growth at all in your deferred retirement accounts . It's all common sense and plain math , prentis . You don't need a calculator or special spreadsheet software to tell you whether you need to develop a Roth conversion strategy or not . Just make an educated guesstimate on what your total deferred accounts will be at age 70 . My own average double on my invested accounts since 1991 has been a double every 6 years , two and a half months . Don't expect to duplicate that going forward as I did manage to do a double in as little as three years durning the hey days of the dot. com bubble of the 90's , but most investors figure they ought to be able to pull a double in 7 to 10 years , maybe more in a fixed income portfolio .

Once again , prentis , IRS publication 590 is your guide and bible and lots of surfing on all the federal income tax tables and Roth web sites and articles will open your eyes as to when it might or might not make sense to do Roth conversions . Why don't I trust any of these Roth conversion calculators on the web . ? ? Because I don't trust them or whoever wrote the computer software program when a simple hand calculator that'll accept millions digits and knowledge of RMD tables and tax tables will tell you on a few blank sheets of paper if it makes sense in your own individual circumstance or not . That and a few sleepless nites thinking about this stuff .

Course you can just decide to do Roth conversions whether it makes economic sense or not , prentis , just because it sounds " neat " to have a taxfree forever Roth . :) . It's your hard earned retirement money . And if you don't calculate your first RMD begining date correctly , you might have to take TWO RMDs in the same tax calendar year . As if one wasn't already enough . And to boot , if your RMD amount isn't correct , the IRS penalty is 50% . :(
Last edited by allancoleman on Tue Apr 29, 2008 8:27 pm, edited 3 times in total.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Bottom line

Post by prentis » Tue Apr 29, 2008 8:14 pm

AllanColeman,

OK, based on all that, if I were to turn 70.5 today, per the worksheet in the IRS 590, with $750 in the IRA I would have to pull out $27,372 this year. That is not unlike what I would probably want to pull out in a typical year anyway. The proverbial 4% sustainable spending rate is $30K. So it works well for me, particularly when (not if) my fixed pension starts to dwindle in purchasing power.

AND!!! I live in Washington State, one of 9 with no state income tax. Life is good.

But I can see that if one were to have millions in one of those accounts the RMD would really hurt and it would make sense to yank as much out as you could early on and a ROTH would be a good vehicle.

You are absolutely right that the 590 document is the bible on this subject. I took a peak at it and it seems readable with examples to illustrate some of the rules. I can see it will be vital to understand the details going into this distribution phase of my investing life. Thank you for leading me to it.

And thanks for all your attention to my learning curve. It is generally true that a lot of attention is paid to the accumulation phase and very little to the rest of the story leading into retirement.

Prentis
A good landing is one that you can walk away from.

allancoleman
Posts: 406
Joined: Tue Sep 11, 2007 9:00 pm
Location: Alaska & Hawaii

Post by allancoleman » Tue Apr 29, 2008 8:41 pm

Congradulations , prentis , in picking one of the seven income tax free states of Washington . Been there often on my travels out of Alaska which is my tax free haven to accomplish all my Roth conversions .

And it sounds like you don't have enough money in your deferred accounts to worry about excessive RMDs . So it sounds like a Roth conversion strategy may not be necessary for you . Sometimes being able to put a issue like whether to do Roth conversions or not behind you to never have to consider again is the best of worlds .

Lastly , look very closely at your begining date for your RMDs so as not be penalized by having to take two RMDs in the same tax calendar year . That's on page 34 - 35 in publication 590 , page 16 in publication 560 , and page 32 in publication 575 . Basicly there is a greater danger of taking your first RMD too late if your birthday is in the second half of the year as mine is on November 26th .
Last edited by allancoleman on Tue Apr 29, 2008 9:15 pm, edited 1 time in total.

retired at 48
Posts: 1726
Joined: Tue Jan 15, 2008 7:09 pm
Location: Saratoga NY; Port Saint Lucie, FL

Post by retired at 48 » Tue Apr 29, 2008 9:04 pm

Hi again prentis!

Guess my roth conversion scenario sure increased your pondering! One thing, though, is you have to build in an expected growth rate for your IRA. Using today's value for age 70 1/2 RMD is shortchanging yourself. And if at age 80 (we wish!) your IRA has perhaps doubled from today, your RMD, which also increases each year, can get quite large. Run a few numbers to illustrate this.

Again, glad to help...R48

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Wed Apr 30, 2008 12:54 am

allancoleman wrote:
Lastly , look very closely at your begining date for your RMDs so as not be penalized by having to take two RMDs in the same tax calendar year . That's on page 34 - 35 in publication 590 , page 16 in publication 560 , and page 32 in publication 575 . Basicly there is a greater danger of taking your first RMD too late if your birthday is in the second half of the year as mine is on November 26th .
Hi again,
Yes I did notice that mumbo-jumbo on the start date in the 590. And we pay those congressmen to write this stuff. Of course THEY have THEIR PEOPLE to help while WE have to decipher the rules or be penalized. Oh well, I have the Bogleheads to help me out.

Thanks all.
A good landing is one that you can walk away from.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Wed Apr 30, 2008 9:21 am

retired at 48 wrote:Hi again prentis!

Guess my roth conversion scenario sure increased your pondering! One thing, though, is you have to build in an expected growth rate for your IRA. Using today's value for age 70 1/2 RMD is shortchanging yourself. And if at age 80 (we wish!) your IRA has perhaps doubled from today, your RMD, which also increases each year, can get quite large. Run a few numbers to illustrate this.
That makes sense and I did think of that. My "today" calculation was just for an illustration of my situation. With any luck it will be worth more when I am actually 70 1/2. Counter to that will be the withdrawals themselves.

Which brings me back to the original question of this thread; large infrequent planned purchases requiring uneven annual distributions and the attendant SS and marginal tax impacts.

Based on what I have gleaned from this discussion I am going to be pulling extra money from my IRA each year during this pre-SS period so to have after tax money available for these expenditures. This will allow me to smooth my IRA withdrawals over time, thereby minimizing the impacts. I'll do the math for the optimal way to do this as "mikenz" suggested with his spreadsheet very early on in this discussion. The sum total will still be compliant with my long term retirement spending plan which includes the occasional gotcha's like new roofs and weddings (I should live so long. Any eligible bachelors out there?).

This "slush fund" will probably be sitting in a taxable account in tax friendly funds. I don't think a ROTH would be appropriate for this use. At least I wouldn't take advantage of the long term benefits.
A good landing is one that you can walk away from.

retired at 48
Posts: 1726
Joined: Tue Jan 15, 2008 7:09 pm
Location: Saratoga NY; Port Saint Lucie, FL

Post by retired at 48 » Wed Apr 30, 2008 11:04 am

prentis wrote:
retired at 48 wrote:Hi again prentis!

Guess my roth conversion scenario sure increased your pondering! One thing, though, is you have to build in an expected growth rate for your IRA. Using today's value for age 70 1/2 RMD is shortchanging yourself. And if at age 80 (we wish!) your IRA has perhaps doubled from today, your RMD, which also increases each year, can get quite large. Run a few numbers to illustrate this.
That makes sense and I did think of that. My "today" calculation was just for an illustration of my situation. With any luck it will be worth more when I am actually 70 1/2. Counter to that will be the withdrawals themselves.

Which brings me back to the original question of this thread; large infrequent planned purchases requiring uneven annual distributions and the attendant SS and marginal tax impacts.

Based on what I have gleaned from this discussion I am going to be pulling extra money from my IRA each year during this pre-SS period so to have after tax money available for these expenditures. This will allow me to smooth my IRA withdrawals over time, thereby minimizing the impacts. I'll do the math for the optimal way to do this as "mikenz" suggested with his spreadsheet very early on in this discussion. The sum total will still be compliant with my long term retirement spending plan which includes the occasional gotcha's like new roofs and weddings (I should live so long. Any eligible bachelors out there?).

This "slush fund" will probably be sitting in a taxable account in tax friendly funds. I don't think a ROTH would be appropriate for this use. At least I wouldn't take advantage of the long term benefits.
Prentis...I don't understand this logic? Here's the key points:

Converting to a roth IRA is the same as an IRA withdrawal.

With monies in the Roth, they grow tax free.

After 5 years, you may begin withdrawals from the Roth...all tax free, to meet major purchase needs. That's what I've done.

Why have money sitting in taxable waiting for a major purchase? If you do some converting to Roth, this year, the clock begins on five year period. In five years you start social security. Then you have this nice Roth to be tapped occasionally, tax free, if needed!

OH, some more pondering! R48

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Rang your bell

Post by prentis » Wed Apr 30, 2008 11:40 am

48,

I sort'a thought my last post might ring your ROTH bell. I see your logic. Let me play with it a little.

Certainly having the ROTH money sitting there after 5 years would function as the distribution smoothing vehicle I am looking for. After the 5 year vesting period, money taken from the ROTH wouldn't impact the taxes for the year I used it. I get that. It is the 5 year thing that gave me pause.

For the sake of argument, say I needed a lump distribution within that 5 year waiting period. Rolling money into the ROTH and taking a cash distribution in the same tax year would not be good. But thinking out loud I suppose I could play it by ear. I could open a ROTH this year, thereby starting the 5 year clock. Then at the end of each succeeding year (or is it by April 15th of the following year?) roll into the fund based on the previous events of any one tax year. If I didn't need extra dough that year, roll some. If I did, wait a year.

How's that, 48? You seem determined to keep me on the straight and narrow in spite of myself. It is appeciated
A good landing is one that you can walk away from.

retired at 48
Posts: 1726
Joined: Tue Jan 15, 2008 7:09 pm
Location: Saratoga NY; Port Saint Lucie, FL

Post by retired at 48 » Wed Apr 30, 2008 2:11 pm

prentis...now you got it. You wait each year, deciding in December. No major expenses/withdrawals, convert to Roth. Note you must convert by 31 December, annually, of the year you desire conversions...can't go to April. And be aware, you can always convert back to IRA...just keep that in mind.

Wow......seems this is helping. Good luck. ..retired at 48

baldeagle
Posts: 61
Joined: Sun Mar 04, 2007 6:23 pm
Location: Portland, OR

Post by baldeagle » Wed Apr 30, 2008 2:59 pm

Hello Prentis,

Seems like you have the same concern as I -- how to get cash for emergencies or big ticket items (e.g., new car) without having to liquidate in a down market or impose higher than normal taxation. In our case, social security is not relevant to the picture as it is taxed at 85% anyway.

Here's how I'm handling it 3 years into retirement at age 63.

Most of our portfolio is IRA, with maybe 10% in taxable accounts and another 5% in Roths that we have had open for many years -- just not much in them. We have been doing annual, partial conversions from IRA to Roth to the top of the 15% bracket for 3 years. An extensive spread sheet modeling of all the possibilities showed it to be the best for us. In fact, the model shows we can keep converting until age 80 when the RMDs finally leave no more room in the 15% bracket.

Eventually, all our taxable account will be gone because we are living on it, and using it to pay the conversion taxes. Then the Roth will replace the taxable account as the source of funds for peaky expenses. Of course, we have to keep enough cash in the Roths to be a source of liquid funds for the peaky expenses.

If you do something similar, remember that you can take anything (but earnings) from a Roth anytime (since you've already paid taxes on deposits), there are no restrictions like 5 year old account, etc.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Wed Apr 30, 2008 4:06 pm

baldeagle wrote:
Eventually, all our taxable account will be gone because we are living on it, and using it to pay the conversion taxes.
Baldeagle,

Thanks for sharing your experiences. They do sound familiar. But as I have quoted your post you are using a taxable account to pay the conversion tax expenses. That triggered a revolting thought. It goes back to an earlier post by R48. You are paying the conversion taxes using money from "outside" the IRA. I would have no such fund to use for paying the taxes and the tax money would come out of the IRA too. R48 called that a no, no.

R48, is my revised plan to do ROTH conversions during these pre-SS years still a good idea under those circumstances?

And, oh by the way, the number of hits on this thread indicates to me that this is not an unusual problem for we boomers.
A good landing is one that you can walk away from.

allancoleman
Posts: 406
Joined: Tue Sep 11, 2007 9:00 pm
Location: Alaska & Hawaii

Post by allancoleman » Wed Apr 30, 2008 11:22 pm

I have done some thought , Prentis , to using one's Social Security check as a source of outside dollars to pay for Roth conversions . That way you'll get the full benefit of converting the full amount of your deferred account amount that you want converted and use federal dollars to save taxes later .

Sounds like a win - win situation to me . :)

Part of the math logic used in using outside dollars for taxes on Roth conversions is :

Example :

$100k converted paying outside dollars for taxes means $100k converted .

$100k converted using dollars inside your deferred account to pay taxes means less dollars converted . Depending on your tax bracket it could mean as little as $85k converted in the 15% marginal tax bracket or $75k converted in the 25% marginal income tax bracket . Or less in higher tax brackets .

Keep in mind that no matter whether you use outside money or money inside your deferred account to pay the taxes on the conversion , in the example above , your deferred account is still short that same $100k . However when you use outside dollars to pay the taxes on that conversion , you get the whole $100k working for you right off the bat by using outside dollars to pay the taxes .

I have never read any studies that even suggest using dollars inside your deferred account to pay the tax bill on the conversion . Other wise you will trash your deferred account using money inside it to pay the tax bill on the conversion . Common sense to me to see why most all experts do not advise using money inside the deferred account to pay the tax bill on a Roth conversion .

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

A puzzle

Post by prentis » Thu May 01, 2008 11:19 am

allancoleman wrote:I have done some thought , Prentis , to using one's Social Security check as a source of outside dollars to pay for Roth conversions . That way you'll get the full benefit of converting the full amount of your deferred account amount that you want converted and use federal dollars to save taxes later .

Sounds like a win - win situation to me . :)

Part of the math logic used in using outside dollars for taxes on Roth conversions is :

Example :

$100k converted paying outside dollars for taxes means $100k converted .

$100k converted using dollars inside your deferred account to pay taxes means less dollars converted . Depending on your tax bracket it could mean as little as $85k converted in the 15% marginal tax bracket or $75k converted in the 25% marginal income tax bracket . Or less in higher tax brackets .

Keep in mind that no matter whether you use outside money or money inside your deferred account to pay the taxes on the conversion , in the example above , your deferred account is still short that same $100k . However when you use outside dollars to pay the taxes on that conversion , you get the whole $100k working for you right off the bat by using outside dollars to pay the taxes .

I have never read any studies that even suggest using dollars inside your deferred account to pay the tax bill on the conversion . Other wise you will trash your deferred account using money inside it to pay the tax bill on the conversion . Common sense to me to see why most all experts do not advise using money inside the deferred account to pay the tax bill on a Roth conversion .
Allancoleman,

Thanks for your very astute comments. However if you remember, my plan is to delay SS until I'm 70. So I would be converting funds from my IRA without SS money available to pay the taxes during the upcoming 5 year period. You have very clearly explained why paying taxes out of the IRA is not smart. But I would have no other source of money. Our spend rate is covered by my pension income, and has up to this year been supplemented by my deferred compensation payments which are now complete and sitting in a MM to pay the bills. I expect to start taking annual distributions from my IRA next year to bridge the 5 year gap before SS starts. (The reasons to do this are the subject of a completely different thread. See Mithcell777's question above).

I suppose I could ditch my plan to delay SS and do ROTH conversions, paying taxes with SS as you describe. The overall long term impacts of that are a matter of higher math. Without doing the math I have an inkling that it wouldn't be the proper road. (I will do the math to find out).

But as it stands I will be paying taxes out of the IRA distributions and the best I can do to minimize the marginal tax rate is plan ahead so to smooth the planned heavy spending years by creating an after tax buffer, be it ROTH or otherwise.

More higher math: Which is worse, "trashing" the deferred account to create a buffer or getting hit by a higher marginal tax rate in a heavy spending year with no after tax buffer in place?

This pickle I'm in comes from having all my nest eggs in a tax deferred account. Too soon old, too late smart. Good reason to advise youngsters to have both a 401k and a ROTH. But, hey, at least I have the IRA. According to the press that is more than most can claim.
A good landing is one that you can walk away from.

retired at 48
Posts: 1726
Joined: Tue Jan 15, 2008 7:09 pm
Location: Saratoga NY; Port Saint Lucie, FL

Post by retired at 48 » Thu May 01, 2008 2:17 pm

prentis wrote:
baldeagle wrote:
Eventually, all our taxable account will be gone because we are living on it, and using it to pay the conversion taxes.
Baldeagle,

Thanks for sharing your experiences. They do sound familiar. But as I have quoted your post you are using a taxable account to pay the conversion tax expenses. That triggered a revolting thought. It goes back to an earlier post by R48. You are paying the conversion taxes using money from "outside" the IRA. I would have no such fund to use for paying the taxes and the tax money would come out of the IRA too. R48 called that a no, no.

R48, is my revised plan to do ROTH conversions during these pre-SS years still a good idea under those circumstances?

And, oh by the way, the number of hits on this thread indicates to me that this is not an unusual problem for we boomers.
Prentis...if you reread my initial postings you will see that I took out a HELOC to partly pay living expenses. Some of that is to pay taxes. In your case, a Heloc to pay your conversion taxes, and perhaps some living costs, may be worth it. Yes you are debt free now, but did you ever have a mortgage? If yes, you then concluded some debt was worth it. So what's the big deal of taking on a small mortgage (HELOC) now, when you have a million dollars behind it?

Now, my HELOC at prime minus 3/4%, with interest tax deductable, is at about the same rate I expect to (conservatively) earn in my IRA. So it is probably a wash. And yes, someday it will have to be paid down, or paid off (although it doesn't have to be). Use some of your regular RMD's after age 70 1/2 to pay it off, later.

Oh, keep pondering.

retired at 48

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Thu May 01, 2008 5:46 pm

retired at 48 wrote:
Now, my HELOC at prime minus 3/4%, with interest tax deductable, is at about the same rate I expect to (conservatively) earn in my IRA. So it is probably a wash. And yes, someday it will have to be paid down, or paid off (although it doesn't have to be). Use some of your regular RMD's after age 70 1/2 to pay it off, later.

Oh, keep pondering.

retired at 48
I'm pondering! I'm pondering!!

Yes I had a mortgage for 30 years and was damn glad to get rid of it.

But beyond that my first thought is if it's "a wash" where's the benefit? But maybe I am jumping to conclusions.

Let me see how this would work in practice. (Maybe I should take a shower. These things seem to come to me better in the shower).

--First I take out a HELOC. (My credit union offers one at 4.25% floating with prime or 5.25% fixed. Tax deductions would take about another 1% out of that.) (For this exercise let me round it to 5%)
--Then I call up Vanguard and have them move an amount from my IRA to a ROTH (similarly invested) that will not put my adjusted "taxable" income over the 15% rate. With my pension this would be something like $20K. (That may be more with the interest deduction from the HELOC. But for the sake of argument I will use $20K). (I would also have to get my wife to quit her part time job). Those dollars are working just as hard as if they were in the IRA. OK so far.
--April 15 the next year I owe the IRS $3K on those dollars which I pay from the HELOC.
--For each year this isn't paid I will at 5% interest have paid $150. Doing that each year, over 5 years I would have paid the credit union $2250 cumulatively (For simplicity I'm not compounding).
--Then I charge the HELOC $20K each year to supplement living expenses.
--The credit union will charge $1,000 per year or $15,000 over the 5 years cumulatively.
--The total interest charge would be $18,750 minus 15% tax deductions, or roughly $16,000 paid out in interest.
--Meanwhile back at Vanguard after 5 years I would have $100,000 in a ROTH along with my IRA (minus that same amount) making whatever it will during that period.
--If it is a "wash" the gains in the ROTH would equal the money paid in interest and I will have pulled the money out at 15% income tax rate.
--OK so far.
--Now I start SS but now I have a $100,000 loan to pay off. I will be paying $5000 per year if I don't. OK, its tax deductible. Call it effectively $4,000. That I pay out of SS and RMD.
--In those same 5 years my IRA/ROTH hasn't been tapped at all so those $100,000 dollars have been working away on top of everything else.
--Now at 70 I have bunches of money coming in, what with the SS, pension and RMD, none of which I can control, and pay the credit union on the loan out of the surplus.

Whew! Here is what what I glean from all this. One benefit is converting IRA money at the 15% VS 25% tax rate. That would amount to $10K for the $100K ROTH conversion over doing this after 70 when I would be at 25% for sure. Secondly at 70 I would have a $100K tax free portion of my investments to tap for "those pesky expenses" that come up once in a while and not trigger higher tax percentages. That is goodness.

The kicker is the $118,250K outstanding loan I would be saddled with at that juncture. I would have to be sure that the tax advantages of the ROTH would out pace the money I would ultimately pay the credit union.

I may be all wet (I just got out of the shower, remember?) Maybe it is my specific situation but it feels like funny money to me, and as my wife just commented, "...a lot of messing around."

I'm pondered out.
A good landing is one that you can walk away from.

retired at 48
Posts: 1726
Joined: Tue Jan 15, 2008 7:09 pm
Location: Saratoga NY; Port Saint Lucie, FL

Post by retired at 48 » Thu May 01, 2008 7:39 pm

Hi prentis...you forgot a major item. The real bonuses begin at age 70 1/2. YOUR RMD'S ARE REDUCED, FOREVER. You could almost live on your pension and social security. So the almost $30K in RMD's, you are being forced to withdraw. And remember, the RMD goes up each year by the new multiplier you have to use, as well as portfolio growth. It is recalculated each year.

Only you can do a full spreadsheet showing the growth of the IRA's, the RMDs each year, under both scenarios (do nothing, or convert) with the after 70, 25% or more tax rate, and I think you will see you come out ahead with Roth conversions. Other forum postings have made similar conclusions. I have posted to show a creative HELOC technique I'm using and the way forward...but you have to finish the details to convince yourself.

You have time...into December...best wishes....R48

overpar
Posts: 85
Joined: Sat Mar 29, 2008 12:44 pm

Post by overpar » Thu May 01, 2008 8:19 pm

If I can add a new voice to this..
Admittedly I haven't studied the entire thread but it seems clear you will have some more room in the 15% bracket until age 70, when you'll be in the 25% bracket forever, but unlikely to go higher (under current law at least). You should begin each of the next few years with the goal of exactly reaching the top of the 15% bracket with IRA withdrawals. If you need all the IRA money for current spending--OK. If not fill up the bracket excess with a Roth conversion. I would argue against a HELOC to fund additional Roth conversions at a 25% rate. I suspect you like being debt free, plus with no current debt and living in a no-tax state, you probably take the standard deduction. You therefore would get no tax
benefit from a interest payment.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Thu May 01, 2008 9:08 pm

retired at 48 wrote:Hi prentis...you forgot a major item. The real bonuses begin at age 70 1/2. YOUR RMD'S ARE REDUCED, FOREVER. You could almost live on your pension and social security. So the almost $30K in RMD's, you are being forced to withdraw. And remember, the RMD goes up each year by the new multiplier you have to use, as well as portfolio growth. It is recalculated each year.

Only you can do a full spreadsheet showing the growth of the IRA's, the RMDs each year, under both scenarios (do nothing, or convert) with the after 70, 25% or more tax rate, and I think you will see you come out ahead with Roth conversions. Other forum postings have made similar conclusions. I have posted to show a creative HELOC technique I'm using and the way forward...but you have to finish the details to convince yourself.

You have time...into December...best wishes....R48
R48,

You have been very patient with me and I truly appreciate all the thought and time you have put to my situation. "Overpar," who I will respond to in a minute, I think hit the nail on the head, at least for my comfort zone. The "major item" you refer too isn't totally lost on me. If I withdraw to the 15% limit (into a ROTH, taxable account, under the mattress, whatever) it will have the same effect of drawing down my IRA as the creative technique you proposed. Even more so in that I will be paying tax out of the IRA as well (albeit at 15% instead of higher).

Another way to look at increasing RMD charges is, if I have to pay more it means I am making more. Not a bad problem to have overall.

Look, I understand the concept of OPM (other peoples money) as a way to leverage investment money. Your HELOC idea may indeed work out in a personal spread sheet, and I promise to look into it. To be truthful I will be looking at with a built-in bias against borrowing money to deal with investments. Being debt free in retirement is powerful ju-ju, at least in this household. The quantitative and secure results of the study would have to be even more powerful. Short of that, it wouldn't be the first time I left money on the table in order to feed my conservatism and need of a good night's rest.

It would be interesting to know if that sort of attitude is pervasive among Bogleheads as a group. Indexing and buy and hold is a far cry from the hysteria of the trading floor.

Once again, with deep gratitude, I thank you.
Prentis
A good landing is one that you can walk away from.

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

A new voice

Post by prentis » Thu May 01, 2008 9:48 pm

overpar wrote:If I can add a new voice to this..
Admittedly I haven't studied the entire thread but it seems clear you will have some more room in the 15% bracket until age 70, when you'll be in the 25% bracket forever, but unlikely to go higher (under current law at least). You should begin each of the next few years with the goal of exactly reaching the top of the 15% bracket with IRA withdrawals. If you need all the IRA money for current spending--OK. If not fill up the bracket excess with a Roth conversion. I would argue against a HELOC to fund additional Roth conversions at a 25% rate. I suspect you like being debt free, plus with no current debt and living in a no-tax state, you probably take the standard deduction. You therefore would get no tax
benefit from a interest payment.
Thanks for weighing in on this marathon post. You suspect correctly about my bias against taking on debt at this stage of life.

What you suggest (drawing down the IRA to 15% limit, spending as necessary, ROTH for the overage) is precisely where this post is leading me. If you had followed the threads you would find out that it started out attempting to limit SS taxation. That for my situation turned out to be a dead duck early on. It then went into methods of smoothing IRA distributions to accommodate uneven expense years without unduly impacting the tax bracket. That morphed it into a lengthy ROTH discussion. It has been all very educational and is precisely why I check into this forum regularly.

Some details to your assumptions:
--I will have headroom to the 15% limit next year, not this, due to the last of a deferred compensation payment that hit this year. I will be at that limit. But next year I will do as you suggest. I will need the cash anyway as part of my planned "bridge" to starting SS at 70.
--I may be in a no income tax state, but that doesn't mean we don't pay taxes here. The 9% state sales tax has just become a federal tax deductible last year and property tax is sky high. My property tax payments are not unlike the principle and interest payments were on my now retired and burned 30 year old mortgage. That and charity donations put us just over the standard deduction last year. So it is possible I might benefit from a deductible interest payment. Still and all, it isn't my bias to do so, although I have promised R48 that I will do the math with a HELOC to see.

Failing that, what you suggest makes horse sense to me.

Thanks, Overpar, for your "new voice." Many heads are better than one. (Love your handle, by the way).
A good landing is one that you can walk away from.

retired at 48
Posts: 1726
Joined: Tue Jan 15, 2008 7:09 pm
Location: Saratoga NY; Port Saint Lucie, FL

Post by retired at 48 » Thu May 01, 2008 10:05 pm

prentis wrote, partly:
R48,

You have been very patient with me and I truly appreciate all the thought and time you have put to my situation. "Overpar," who I will respond to in a minute, I think hit the nail on the head, at least for my comfort zone. The "major item" you refer too isn't totally lost on me. If I withdraw to the 15% limit (into a ROTH, taxable account, under the mattress, whatever) it will have the same effect of drawing down my IRA as the creative technique you proposed. Even more so in that I will be paying tax out of the IRA as well (albeit at 15% instead of higher).
Prentis, I stated in my opening post I sensed your reluctance to take on debt (even though in the early days a "mortgage" was OK). And one has to be comfortable in these actions.

That said, a final thought. You don't have to take a HELOC to pay taxes. I don't see a difference in paying taxes from your pension, or from an IRA withdrawal. That is, your additional IRA withdrawals are for "living expenses". Taxes are part of living. Real estate taxes, income taxes, and why not Roth conversion income taxes. A couple thousand a year does not break your bank. Withdrawing a few thousand now, saves many more thousands on back end after age 70 1/2.

See ya. R48

User avatar
prentis
Posts: 220
Joined: Sat Mar 03, 2007 9:49 pm
Location: Washington State

Post by prentis » Thu May 01, 2008 10:42 pm

retired at 48 wrote:
Prentis, I stated in my opening post I sensed your reluctance to take on debt (even though in the early days a "mortgage" was OK). And one has to be comfortable in these actions.

That said, a final thought. You don't have to take a HELOC to pay taxes. I don't see a difference in paying taxes from your pension, or from an IRA withdrawal. That is, your additional IRA withdrawals are for "living expenses". Taxes are part of living. Real estate taxes, income taxes, and why not Roth conversion income taxes. A couple thousand a year does not break your bank. Withdrawing a few thousand now, saves many more thousands on back end after age 70 1/2.
Re: your first statememt...true enough. I think mentally it makes a difference having a mortgage when you are in your earning years and moving up the ranks than in the fixed income phase of one's life. The operative word here is "mentally."

Re: your second point: well we pretty much in lock step on that concept. That is pretty much what happens with what "Overpar" has described. The pension, IRA withdrawls and the wife's small income are pretty much intermingled during this period before SS. Overages in the 15% headroom will go to a ROTH based on this lengthy forum discussion. It is difficult to determine what is "outside the IRA" to pay the taxes and what isn't.

One little aside: It illustrates one little known (at least by me) rationale for delaying SS to 70. It allows this low income tax period to draw out IRA money into after tax accounts. I don't remember seeing it mentioned in SS start time literature.

And on that note, let us cease and desist on this subject. I think we have beaten the horse enough. It has been a great ride and very influential for me. I hope it has been equally informative to the 1600 or so folks that appear to have been listening in.

[/quote]See ya. R48[/quote]

Take care, R48
A good landing is one that you can walk away from.

Post Reply