IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implications

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Beehave
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Joined: Mon Jun 19, 2017 12:46 pm

IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implications

Post by Beehave » Sat Aug 12, 2017 9:35 pm

Consider couple on Medicare and over 70.5 years of age. They must take RMDs each year from their IRAs (and any 401ks).
After they have taken their RMDs in a year

(1) Can withdraw any remaining IRA funds they wish and deposit them into a Roth IRA?

(2) If yes, then if they withdraw significant funds, each dollar will be added to that year's income so that (a) at $155,600 they will lose exemption claims, (b) at $170,001 their Medicare costs will increase (and to next levels successively at $214,001 and $320,001, and top off at over $428,000) two years down the road for a duration of one year, and (c) the couple will pay taxes per the then current tax bracket assignments for couples filing jointly.

(3) Suppose the couple has over $428,000 to convert. They will trigger all of the bracket and limit costs mentioned above. Suppose further they have part-time job income, pension, Social Security, dividend interest, and required RMD income that totals to below all of the trigger points in (2) above. Suppose further that they take the standard deduction and have no mortgage interest, no state tax, and no muni bond income.

(4) Is it possible they will trigger the AMT taking out over $428K in addition to their regular income? If so, would it be a considerable hit relative to the max tax bracket?

(5) Are there any other considerations regarding expenses or taxes not mentioned?

I think I know the answers but am not sure, and in any case I hope this will be helpful to readers approaching retirement who are not fully aware of the implications of the mandatory withdrawals (RMDs) from IRAs and 401Ks that start at age 70.5.

delamer
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Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by delamer » Sat Aug 12, 2017 10:25 pm

Download the TaxCaster app, enter all their income data, and you'll have your answers.

They would need to determine if it would be better to do conversions over a period of a couple years to minimize taxes (and the tradeoff with multiple years of higher Part B premiums).

sport
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Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by sport » Sat Aug 12, 2017 10:58 pm

With that much to convert, you probably do not want to do it all in one year, for the reasons you mention. Once your RMD is complete, you can convert any part of a TIRA to a Roth IRA. It seems you would want to do this in a way to minimize the tax and Medicare implications.

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FiveK
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Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by FiveK » Sat Aug 12, 2017 11:03 pm

TaxCaster might or might not be accurate for high incomes - don't know. It is not very good for low incomes when the saver's credit, etc., are significant.

Using full versions of H&RBlock, TurboTax, etc., will work (except for the Medicare premium bumps).

Assuming
part-time job income = $12K
pension = $24K
Social Security = $24K
qualified dividends = $6K
the various marginal rates (including Medicare premium bumps) for tIRA withdrawals are
Image
according to Tools and calculators - Personal_finance_toolbox - Bogleheads.

kaneohe
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Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by kaneohe » Sun Aug 13, 2017 1:10 am

Beehave wrote:
Sat Aug 12, 2017 9:35 pm
Consider couple on Medicare and over 70.5 years of age. They must take RMDs each year from their IRAs (and any 401ks).
After they have taken their RMDs in a year

(...............................

(2) If yes, then if they withdraw significant funds, each dollar will be added to that year's income so that (a) at $155,600 they will lose exemption claims, (........................................................
Didn't think exemptions were lost that soon............ http://www.savingtoinvest.com/itemized- ... taxpayers/

Might you be looking at MFS instead ofMFJ?

Beehave
Posts: 54
Joined: Mon Jun 19, 2017 12:46 pm

Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by Beehave » Sun Aug 13, 2017 1:44 am

kaneohe wrote:
Sun Aug 13, 2017 1:10 am
Beehave wrote:
Sat Aug 12, 2017 9:35 pm
Consider couple on Medicare and over 70.5 years of age. They must take RMDs each year from their IRAs (and any 401ks).
After they have taken their RMDs in a year

(...............................

(2) If yes, then if they withdraw significant funds, each dollar will be added to that year's income so that (a) at $155,600 they will lose exemption claims, (........................................................
Didn't think exemptions were lost that soon............ http://www.savingtoinvest.com/itemized- ... taxpayers/

Might you be looking at MFS instead ofMFJ?
Thanks, you are right. I looked at the 1040 form which gives the $156K number at line 42, but your reference and others indicate that the married filing jointly number is double that. I appreciate your response!

Beehave
Posts: 54
Joined: Mon Jun 19, 2017 12:46 pm

Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by Beehave » Sun Aug 13, 2017 1:56 am

delamer wrote:
Sat Aug 12, 2017 10:25 pm
Download the TaxCaster app, enter all their income data, and you'll have your answers.

They would need to determine if it would be better to do conversions over a period of a couple years to minimize taxes (and the tradeoff with multiple years of higher Part B premiums).
Thanks. With current tax brackets I believe you are right and it would be best to spread out Roth moves over years. What prompted my question was the desire to make sure I understood the current tax setup and then also consider the possibility that tax bracket percentages and income levels may change on which case I want to be able to figure out if there might be a change that could justify significantly higher Roth moves. I was concerned about losing personal exemptions, Medicare cost increases, and possibility AMT might be triggered.
Your response and the responses of others have improved my understanding and I appreciate it!

JW-Retired
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Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by JW-Retired » Sun Aug 13, 2017 6:31 am

Beehave wrote:
Sat Aug 12, 2017 9:35 pm
Consider couple on Medicare and over 70.5 years of age. They must take RMDs each year from their IRAs (and any 401ks).
After they have taken their RMDs in a year

(1) Can withdraw any remaining IRA funds they wish and deposit them into a Roth IRA?

(2) If yes, then if they withdraw significant funds, each dollar will be added to that year's income so that (a) at $155,600 they will lose exemption claims, (b) at $170,001 their Medicare costs will increase (and to next levels successively at $214,001 and $320,001, and top off at over $428,000) two years down the road for a duration of one year, and (c) the couple will pay taxes per the then current tax bracket assignments for couples filing jointly.
Wife and I are such a couple. We are only doing very modest annual Roth conversions that avoid getting into the next tax bracket and/or the next Medicare premium boost. Any tax-deferred amount Roth converted is for sure Federal and State taxable income just like the RMDs.

We do it mainly for heirs. Once you are already over 70.5 and drawing all your retirement income streams like pension/SS/RMDs/whatever, Roth conversions yield little or no benefit. The time to do Roth conversions is before you are taking SS & RMDs.
JW
Retired at Last

retired early&luv it
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Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by retired early&luv it » Sun Aug 13, 2017 9:17 am

I have had good luck with tax caster, but when it comes to income impacts on medicare premiums I make my own spreadsheet and calculate how much I can convert from my IRA to Roth in late December after my cap gain distributions and dividends are actual numbers instead of estimates. A small error can have big implications on medicare premiums, so I want to use accurate numbers.

I am in a much lower bracket than you and am not yet 70.5. I intend to convert all of my IRA to Roth before I turn 70.

kaneohe
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Joined: Mon Sep 22, 2008 12:38 pm

Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by kaneohe » Sun Aug 13, 2017 9:35 am

retired early&luv it wrote:
Sun Aug 13, 2017 9:17 am
I have had good luck with tax caster, but when it comes to income impacts on medicare premiums I make my own spreadsheet and calculate how much I can convert from my IRA to Roth in late December after my cap gain distributions and dividends are actual numbers instead of estimates. A small error can have big implications on medicare premiums, so I want to use accurate numbers.
..........................................
Certainly easier if you get it right the first time but not fatal if you go over...........you can always recharacterize the excess conversion so you get back to the safe side.

pshonore
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Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by pshonore » Sun Aug 13, 2017 10:20 am

kaneohe wrote:
Sun Aug 13, 2017 9:35 am
retired early&luv it wrote:
Sun Aug 13, 2017 9:17 am
I have had good luck with tax caster, but when it comes to income impacts on medicare premiums I make my own spreadsheet and calculate how much I can convert from my IRA to Roth in late December after my cap gain distributions and dividends are actual numbers instead of estimates. A small error can have big implications on medicare premiums, so I want to use accurate numbers.
..........................................
Certainly easier if you get it right the first time but not fatal if you go over...........you can always recharacterize the excess conversion so you get back to the safe side.
And its conceivable that if you have a large "tax free profit" in the Roth due to appreciation after conversion, it may be better to grit your teeth and pay the extra Medicare for 12 months in lieu of giving it back.

delamer
Posts: 2486
Joined: Tue Feb 08, 2011 6:13 pm

Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by delamer » Sun Aug 13, 2017 10:22 am

JW-Retired wrote:
Sun Aug 13, 2017 6:31 am
Beehave wrote:
Sat Aug 12, 2017 9:35 pm
Consider couple on Medicare and over 70.5 years of age. They must take RMDs each year from their IRAs (and any 401ks).
After they have taken their RMDs in a year

(1) Can withdraw any remaining IRA funds they wish and deposit them into a Roth IRA?

(2) If yes, then if they withdraw significant funds, each dollar will be added to that year's income so that (a) at $155,600 they will lose exemption claims, (b) at $170,001 their Medicare costs will increase (and to next levels successively at $214,001 and $320,001, and top off at over $428,000) two years down the road for a duration of one year, and (c) the couple will pay taxes per the then current tax bracket assignments for couples filing jointly.
Wife and I are such a couple. We are only doing very modest annual Roth conversions that avoid getting into the next tax bracket and/or the next Medicare premium boost. Any tax-deferred amount Roth converted is for sure Federal and State taxable income just like the RMDs.

We do it mainly for heirs. Once you are already over 70.5 and drawing all your retirement income streams like pension/SS/RMDs/whatever, Roth conversions yield little or no benefit. The time to do Roth conversions is before you are taking SS & RMDs.
JW
We are considering the same thing, to benefit heirs. But if our best guess is that our heirs will be in a lower tax bracket than us, it doesn't make sense. So many unknowns.

The Wizard
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Location: Reading, MA

Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by The Wizard » Sun Aug 13, 2017 11:32 am

JW-Retired wrote:
Sun Aug 13, 2017 6:31 am
...Once you are already over 70.5 and drawing all your retirement income streams like pension/SS/RMDs/whatever, Roth conversions yield little or no benefit. The time to do Roth conversions is before you are taking SS & RMDs.
JW
I agree.
Plus the older you are, the less time to reap the tax benefit of Roth accounts.

I recommend a level taxable income approach in retirement. Use a spreadsheet to project your Taxable Income (or AGI) through age 75 or so.
Now if you're both already 70.5+, then it's easy. Just take RMDs and reinvest proceeds in taxable account wisely. No Roth conversions...
Attempted new signature...

SGM
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Re: IRA withdrawal tax aConsider couple on Medicare and over 70.5 years of age. They must take RMDsnd Medicare implicat

Post by SGM » Sun Aug 13, 2017 11:56 am

We did our conversions prior to age 70 1/2. I also did it while working part time or while retired. You cannot convert the RMDs, but you can convert additional withdrawals after age 70 1/2.

We like how we lowered our taxable income by paying taxes out of a taxable account. I feel like a broken record, but I repeat that the purchasing power is unchanged by making a Roth conversion at the time of conversion. I would rather have $100k in a Roth than $100k in a tIRA and $25k in taxable even though at the time of conversion the purchasing power is unchanged. We are now saving some tax money from age 63 to 70 while we have a lower dividend income in taxable than we would otherwise have. We have the same amount essentially in a Roth as we would have had in tIRA some 6 years after starting conversions but now Uncle Sam isn't a silent partner.

Now our Medicare premium adjustments will be a little bit lower than they would have been without conversions starting next year. Our last conversion was in 2015.

Soon we will have increased SS income. Meanwhile all our investments have done well and there is still plenty of taxable income. Soon inheritances may increase our income and the statistical likelihood that DW will outlive me will put her in a higher tax bracket.

My taxable income hasn't changed that much because I no longer put money into a traditional solo 401k for the two of us.
It isn't just good for the next generation that I decided to convert. As they say your mileage may vary.

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