Things to do near or in retirement while in the 15% bracket.

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midareff
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Things to do near or in retirement while in the 15% bracket.

Post by midareff »

I can think of a couple and I hope for many of you to chime in with additional ideas. I've done turbo tax projections and while my pension and SS allow me some 15% space I have been harvesting capital gain to reset the cost basis and converting IRA money to Roth. When my RMD starts I will be in the 25% bracket and neither would seem feasible at that point.

Ideas?
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House Blend
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Re: Things to do near or in retirement while in the 15% bracket.

Post by House Blend »

Those are probably the two most widely applicable.

For those visiting the 15 percent bracket on a temporary basis, another item on the agenda would be something not to do: charitable donations.

Before you spit coffee all over your iPad, please understand that I am not suggesting that you should join the Ebenezer Scrooge Club.

Instead, consider setting up a donor advised fund in advance so that you can separate the timing of when you take charitable deductions from the timing of donations. Naturally, you want to take the deductions before joining the 15 percent club.

Also, qualified charitable distributions after you are back in a higher bracket with SS + RMDs can be a way to get more bang for your buck than donations as a 15 percenter. (Especially if you are taking the standard deduction.)
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Peter Foley
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Re: Things to do near or in retirement while in the 15% bracket.

Post by Peter Foley »

There have been a few threads about this topic recently. To follow up on House Blend's suggestions, depending on your state and municipality you might be able to pay some property taxes and state taxes in advance to squeeze in another year of 15% bracket. Bunching deductions and taking the standard deduction in opposite years might give you a bit more maneuverability.

State income taxes can complicate the decision making process a little, as can Affordable Care Act subsidies for health insurance.

I'm not a fan of annuities, but I recently read an article that piqued my interest. Qualified longevity annuity contracts (QLAC) can be used to lessen the impact of RMD's. The basic idea is to buy a contract around the age of 70 (with IRA/401k money) and create a deferred income stream that starts at perhaps age 80 or 85. There are some limitations in that only 25% of a retirement account can be invested in a QLAC, or $125,000 whichever is less.
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Watty
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Re: Things to do near or in retirement while in the 15% bracket.

Post by Watty »

midareff wrote:When my RMD starts I will be in the 25% bracket and neither would seem feasible at that point.
A few things;

1) If you are in the 25% federal tax bracket when the RMD's start then your effective marginal tax bracket may be much higher if you are in the income range where each extra dollar of income causes more of your Social Security to be taxed.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

https://www.bogleheads.org/wiki/Social_ ... calculator

You could also be in an income range where other tax credits are phased out as your income increases.

2) If you are married then be sure to run your numbers as if one of you survives the other. The survivors tax bracket may be much different.

3) Be sure to look at the likely tax bracket of whoever will eventually inherit the IRA. If it is a charity or someone that will be in a lower tax bracket then the Roth conversion may not be best for maximizing your estate.

4) Paying the taxes on the RMD might not be fun but one thing to keep in mind is that the RMD's don't force you to actually start drawing down the IRA until the RMD percentage is higher than the percentage that your investments are earning. If you have a balanced portfolio and can earn 7%(including inflation) then that will not happen until you are in your late 80's. See table III here;

https://www.bogleheads.org/wiki/IRA_distribution_tables

Many people will not live that long.

5) If you do a Roth conversion in the 25% tax bracket and you remain in the 25% tax bracket then it really didn't matter one way or the other since the end result is the same(except for the RMD's). The Roth conversion is only a bad deal if you are your heirs are in a lower tax bracket. Tax changes are impossible to predict but if tax rates go up then the Roth conversion would have been better.

6) If you have enough money in the taxable accounts to pay the taxes on a Roth conversion then it looks better. For example do a $1,000 Roth conversion and pay the taxes out of it, then you only have $750 in the Roth. If you pay taxes from other funds then you have $1,000 in the Roth so the purchasing power of all your retirment accounts is higher.
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midareff
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Re: Things to do near or in retirement while in the 15% bracket.

Post by midareff »

Houseblend... thanks, but I dialed in a few K to UNICEF and Wounded Warrior this year as part of staying at 15%. Will look into your suggestion for next year and beyond.

Peter.. thanks too. Medicare and former employer's spousal coverage for health insurance here. Florida is a no income tax state. QLAC is an interesting concept although it would seem the trade-off is greater withdrawals from taxable by delaying the RMD income stream. Since I have a younger Thai wife and I/we want her to return to family in Thailand when I pass, so creating a delayed income stream doesn't seem appropriate to our situation at first blush.

Watty.. thank you also. You wrote: "one thing to keep in mind is that the RMD's don't force you to actually start drawing down the IRA until the RMD percentage is higher than the percentage that your investments are earning. If you have a balanced portfolio and can earn 7%(including inflation) then that will not happen until you are in your late 80's. See table III here;" I guess I just don't grasp what you are saying. As far as I know there is a factor based on my age and wife's age that divides the prior December 31, IRA portfolio balance starting the year I turn 70.5, or no later than April 15 of the following year (which requires two RMD's that year). I've looked at Table 3 as you referenced and don't see anything about IRA portfolio growth being a substitute for withdrawing from the IRA. If you meant portfolio growth more than offsetting the amount of the drawdown I can understand, if not.. ??

Thanks to all.
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Gattamelata
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Re: Things to do near or in retirement while in the 15% bracket.

Post by Gattamelata »

Watty wrote:

4) Paying the taxes on the RMD might not be fun but one thing to keep in mind is that the RMD's don't force you to actually start drawing down the IRA until the RMD percentage is higher than the percentage that your investments are earning. If you have a balanced portfolio and can earn 7%(including inflation) then that will not happen until you are in your late 80's. See table III here;

https://www.bogleheads.org/wiki/IRA_distribution_tables

Many people will not live that long.
Are you sure about that bolded part? I pay RMDs and have read quite a lot about them, and this is the first I've heard of this bit about RMDs factoring in returns in any way. For instance, in 2009 RMDs were not required by an act of Congress in order to keep the recession from destroying account balances. If you were correct, Congress wouldn't have had to do anything. I may have misunderstood your meaning, but if I haven't and you're wrong, this advice could lead people into trouble with the IRS.
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Watty
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Re: Things to do near or in retirement while in the 15% bracket.

Post by Watty »

What I was trying to say was that the IRA could be growing faster than you are having to make the RMDs.

For example if you have $100,000 and the RMD is 3.65% when you are 70 then you would have to withdraw $3,650 as the RMD.

The money in the IRA is still invested and might grow at 6.65% during that year so that it could also grow by $6,650.

At the end of the year you have $100,000 - 3,650 + 6,650= $103,000.

So for that year your IRA did not decrease because of the RMD.
cherijoh
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Re: Things to do near or in retirement while in the 15% bracket.

Post by cherijoh »

Watty wrote:What I was trying to say was that the IRA could be growing faster than you are having to make the RMDs.

For example if you have $100,000 and the RMD is 3.65% when you are 70 then you would have to withdraw $3,650 as the RMD.

The money in the IRA is still invested and might grow at 6.65% during that year so that it could also grow by $6,650.

At the end of the year you have $100,000 - 3,650 + 6,650= $103,000.

So for that year your IRA did not decrease because of the RMD.
Caught by the definition of "drawdown". You meant "below starting value", they interpreted it as "taking "RMDs"
drawpoker
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Re: Things to do near or in retirement while in the 15% bracket.

Post by drawpoker »

Peter Foley wrote:.......I'm not a fan of annuities, but I recently read an article that piqued my interest. Qualified longevity annuity contracts (QLAC) can be used to lessen the impact of RMD's. The basic idea is to buy a contract around the age of 70 (with IRA/401k money) and create a deferred income stream that starts at perhaps age 80 or 85. There are some limitations in that only 25% of a retirement account can be invested in a QLAC, or $125,000 whichever is less.
Interesting you brought this up - was part of a thread on another message board that delved into just this hype recently.

Turns out the catch is =

What the salesmen aren't telling people is that you have to purchase a "return-of-premium death benefit" with this type annuity if you have a spouse (or other heirs to consider) Which results in drastically lower payouts when payouts begin at age 80 or 95.

Independent financial advisors ( Not Annuity Salesmen) have done cost-benefit analyses on these - the findings are that a person would have to live to age 100 to realize any benefits over leaving the money within the IRA and taking RMDs and re-investing them in a taxable account.

check it out:

https://www.kitces.com/blog/why-a-qlac- ... inimum-dis...
Wagnerjb
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Re: Things to do near or in retirement while in the 15% bracket.

Post by Wagnerjb »

House Blend wrote:Those are probably the two most widely applicable.

For those visiting the 15 percent bracket on a temporary basis, another item on the agenda would be something not to do: charitable donations.

Before you spit coffee all over your iPad, please understand that I am not suggesting that you should join the Ebenezer Scrooge Club.

Instead, consider setting up a donor advised fund in advance so that you can separate the timing of when you take charitable deductions from the timing of donations. Naturally, you want to take the deductions before joining the 15 percent club.
What I found when I ran a simulation is that making a charitable deduction while in the 15% bracket was equivalent to getting a charitable deduction at the 30% marginal tax rate. If you make a (for example) $5000 charitable deduction, it lowers your income by $5,000 and saves taxes at 15%. At the same time, you generate another $5,000 in long term capital gains....which are taxed at 0%.

The act of donating $5,000 served to lower your taxes by 15% ($750) and it also served to save you from paying 15% on the $5,000 of capital gains ($750). If you look, you see that your income is unchanged after these two actions, but your taxes are $750 lower. :D

If you are normally in the 39% bracket, this probably isn't a wise move since your deductions are more valuable in other years. But if you are normally in the 25% bracket, getting the equivalent of a 30% deduction is better than you get in other years.

Best wishes.
Andy
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Peter Foley
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Re: Things to do near or in retirement while in the 15% bracket.

Post by Peter Foley »

drawpoker wrote:
Turns out the catch is =

What the salesmen aren't telling people is that you have to purchase a "return-of-premium death benefit" with this type annuity if you have a spouse (or other heirs to consider) Which results in drastically lower payouts when payouts begin at age 80 or 95.

Independent financial advisors ( Not Annuity Salesmen) have done cost-benefit analyses on these - the findings are that a person would have to live to age 100 to realize any benefits over leaving the money within the IRA and taking RMDs and re-investing them in a taxable account.
Thanks for the heads up. Based on what I've read, you are confirming my suspicion not to trust annuities except in some exceptional instances.
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Fat-Tailed Contagion
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Re: Things to do near or in retirement while in the 15% bracket.

Post by Fat-Tailed Contagion »

We are in similar situation, deferring SS until age 70 and living off of taxable savings fund for a couple of years + Pensions.

1. Maxing Roth Conversions up to top of 15% Bracket

2. Taxable Capital Gains we need to live on is getting 0% Cap Gains rate

but in our case, maxing Roth is more valuable as it is a certain 10% advantage (25-15%) versus an uncertain 15% Capital Gains rate (if we don't need to spend that portion of our savings).

This will leave us with SS + Pensions + RMDs in the 25% Bracket in 2018.

The only other idea is to look into QLACs to defer RMDs, although I am not well educated on them yet.

Good luck!
Last edited by Fat-Tailed Contagion on Thu Nov 19, 2015 10:09 am, edited 2 times in total.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” | ― Benjamin Graham, The Intelligent Investor (75/25 - 50/50 - 25/75)
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kramer
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Re: Things to do near or in retirement while in the 15% bracket.

Post by kramer »

The only other idea is to look in QLACs to defer RMDs, although I am not well educated on them yet.
Yes, I will be in the 15% bracket during most of my 50's and 60's as I slowly convert a Traditional IRA to ROTH IRA and take 0% Cap gains when appropriate. However, my understanding is that I can buy a QLAC up to 25% of the IRA value at anytime (or up to $125,000, whichever is lesser). So I may do this in my early 60's for the maximum amount, giving me a better chance of draining more of my Traditional IRA. I am hoping QLACs become more cost competitive over the next decade, as I believe they were only approved for use in IRAs last year.

Another item is the foreign tax credit for those who have a foreign tax credit of more than $300/$600 in their taxable account if they are single/married. In your first year of low taxes (and each year thereafter), you may not qualify for the full foreign tax credit because your overall income tax rate is not as high as the tax rate on foreign mutual funds that generated the credit (the latter averages around 7%). So if your tax rate was 2%, you would only get about 2/7 of your foreign tax credit. However, you can carry back your foreign taxes paid to the previous year. I did this in my first low tax year of retirement, carrying back my foreign tax credit on my mutual funds to the previous year when I was working and my income taxes were higher, and got a 4 figure tax refund. In subsequent years, there is nothing you can do except carry the unused foreign tax credit forward.
kaneohe
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Re: Things to do near or in retirement while in the 15% bracket.

Post by kaneohe »

Wagnerjb wrote:............................................

What I found when I ran a simulation is that making a charitable deduction while in the 15% bracket was equivalent to getting a charitable deduction at the 30% marginal tax rate. If you make a (for example) $5000 charitable deduction, it lowers your income by $5,000 and saves taxes at 15%. At the same time, you generate another $5,000 in long term capital gains....which are taxed at 0%.

The act of donating $5,000 served to lower your taxes by 15% ($750) and it also served to save you from paying 15% on the $5,000 of capital gains ($750). If you look, you see that your income is unchanged after these two actions, but your taxes are $750 lower. :D

If you are normally in the 39% bracket, this probably isn't a wise move since your deductions are more valuable in other years. But if you are normally in the 25% bracket, getting the equivalent of a 30% deduction is better than you get in other years.

Best wishes.
Andy..............................your first sentence refers to the 15% bracket; your last sentence refers to the 25%bracket. Did you mean 25% in the first?
When you say that you generate another 5K of LTCG .....which are taxed at 0%, that assumes you have 5K (or more) of LTCG/QDIV? Also your itemized deductions need to exceed the std deduction even before the charitable deduction? I think what you said is true under certain specific conditions but may be misleading unless those conditions are specified?
Wagnerjb
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Re: Things to do near or in retirement while in the 15% bracket.

Post by Wagnerjb »

kaneohe wrote: Andy..............................your first sentence refers to the 15% bracket; your last sentence refers to the 25%bracket. Did you mean 25% in the first?
When you say that you generate another 5K of LTCG .....which are taxed at 0%, that assumes you have 5K (or more) of LTCG/QDIV? Also your itemized deductions need to exceed the std deduction even before the charitable deduction? I think what you said is true under certain specific conditions but may be misleading unless those conditions are specified?
Yes, I meant 15% in the first. Let me see if I can lay out the scenario clearly, and I welcome any clarifications you may want to add:

An individual is normally in the 25% marginal bracket, or expects to be in the 25% bracket soon (such as the OP). This individual is therefore temporarily in the 15% bracket and would like to maximize the benefit of this tax bracket. This situation also can happen with an early retiree, before RMDs kick in.

For the year in question, the individual has the following scenario:

Ordinary income of $50,000 (could be from a Roth conversion)
Long Term Capital Gains of $50,000
Itemized deductions plus personal exemptions of $25,000
Taxable income of $75,000 (for MFJ, this is about where the cutoff is for the 15% bracket)

This individual is considering donating $5,000 in additional contributions this year. If he does so, his taxable income is lowered by $5,000 which lowers his income tax by $750. At the same time, he sells appreciated securities with a long term capital gain of $5,000 which is taxed at $0. My point is that this donation has effectively saved taxes at the 30% rate because it a) lowered his income tax by 15% and b) freed up space in his taxable income such that he can now take another $5,000 in LTCG and avoid the 15% tax on those gains.

Your point that the individual needs to be able to itemize is a good one, otherwise the charitable deduction won't generate the full 30% effective tax rate benefit.

My comment about the 25% rate is as follows:

If the individual is in a temporary low income situation, then this strategy may not make sense. If you are normally in the 39% marginal bracket and are in the 15% bracket for a year or two (due to unemployment for example) then waiting and taking the charitable deduction while in the 39% bracket would be smarter. But if the OP is facing the 25% bracket when RMDs kick in, then taking the charitable deduction this year will generate a superior benefit than taking it once he is in RMDs.

Best wishes.
Andy
kaneohe
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Re: Things to do near or in retirement while in the 15% bracket.

Post by kaneohe »

Andy...thanks for clarifying. I understand now from your numerical example. I'm more used to a similar example going the other way.....
taxable income (including LTCG/QDIV) in the 15% bracket just below the 15%/25% tax bracket borderline. Now if you add ordinary income,
you get a 30%marginal tax rate due to 15% on the ordinary income and 15% on the LTCG displaced up over the 15/25% bracket borderline so
now taxed at 15% instead of 0%. Your example is basically the same example going the other way.

I guess the key points are that you need to be able to itemize to take advantage of the charitable deduction and also that your income/deductions
need to be such that some of your LTCGs get pushed up above the 15/25% bracket borderline by the additional income and pushed down by the charitable deduction....................if in the 15% bracket,you need to be the top of that bracket. Otherwise the effect of the deduction may vary from 30% down to 15% so best to doublecheck w/ tax software or a tax calculator like Taxcaster.
Wagnerjb
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Re: Things to do near or in retirement while in the 15% bracket.

Post by Wagnerjb »

kaneohe wrote:Andy...thanks for clarifying. I understand now from your numerical example. I'm more used to a similar example going the other way.....
taxable income (including LTCG/QDIV) in the 15% bracket just below the 15%/25% tax bracket borderline. Now if you add ordinary income,
you get a 30%marginal tax rate due to 15% on the ordinary income and 15% on the LTCG displaced up over the 15/25% bracket borderline so
now taxed at 15% instead of 0%. Your example is basically the same example going the other way.

I guess the key points are that you need to be able to itemize to take advantage of the charitable deduction and also that your income/deductions
need to be such that some of your LTCGs get pushed up above the 15/25% bracket borderline by the additional income and pushed down by the charitable deduction....................if in the 15% bracket,you need to be the top of that bracket. Otherwise the effect of the deduction may vary from 30% down to 15% so best to doublecheck w/ tax software or a tax calculator like Taxcaster.
Let's take the couple who are in a temporary low income year. Maybe one spouse is unemployed or took time off to continue their education. They have some earned income but have the same income tax position ($75k in taxable income) as I laid out above. They normally contribute to a Roth, but in this year they would save 30% if they lowered their income by contributing to a TIRA instead (and at the same time took some LTCG to get back to $75k in taxable income).

Maybe they contribute to a TIRA this year and save 30%, then when they have both incomes again and are in the 25% bracket, they can convert the TIRA to a Roth. Free money!

Best wishes.
Andy
kaneohe
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Re: Things to do near or in retirement while in the 15% bracket.

Post by kaneohe »

Andy.....clever idea, substituting TIRA deduction for charitable deduction. Again the key element here seems to be that you need to be at that
or near) the 15/25% bracket borderline in taxable income in order to get the maximum 30% benefit that you mention
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