Flying Under Uncle Sam's Radar?

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Marsh45
Posts: 10
Joined: Sun Jan 21, 2018 1:48 pm

Flying Under Uncle Sam's Radar?

Post by Marsh45 » Sat Feb 03, 2018 2:32 pm

Newbie here. Am I missing something?

My understanding is that with the 2018 tax law changes, as long as I pull less than $38,600 retirement income (after standard deduction) out of my IRA accounts, my qualifying dividends/LT cap gains earned in my taxable brokerage account are taxed at 0%.

I'm 52, single, 28% tax bracket, no state tax, with ~$500k in tax deferred (401k, Roth, Inherited IRA), ~$950k in taxable. I have no debt and am planning to retire at 55 at which time I'm eligible to take a pension.

Q1) Is my understanding generally correct? (see below withdrawal possibility)

Q2) Am I right to think that "maybe" it's a good idea to take my non-cola pension in lump sump (~$750k) and invest it in a conservative Vanguard IRA? My thinking is that in addition to not having an eligible surviving benefactor, I could self regulate my overall IRA withdrawals to maintain 0% tax on taxable account...at least until SS and RMD's kick in?

I appreciate your input.

$15,000 Qualified Dividends/LT Cap Gains
$50,600 IRA (traditional 401k)

$12,000 standard deduction
$38,600 taxable

$953 10% tax
$3,489 12% tax
$4,442 total tax

$61,158 Annual take home
$5,097 Monthly take home

retiredjg
Posts: 34397
Joined: Thu Jan 10, 2008 12:56 pm

Re: Flying Under Uncle Sam's Radar?

Post by retiredjg » Sat Feb 03, 2018 3:20 pm

Marsh45 wrote:
Sat Feb 03, 2018 2:32 pm
Newbie here. Am I missing something?

My understanding is that with the 2018 tax law changes, as long as I pull less than $38,600 retirement income (after standard deduction) out of my IRA accounts, my qualifying dividends/LT cap gains earned in my taxable brokerage account are taxed at 0%.

I'm 52, single, 28% tax bracket, no state tax, with ~$500k in tax deferred (401k, Roth, Inherited IRA), ~$950k in taxable. I have no debt and am planning to retire at 55 at which time I'm eligible to take a pension.

Q1) Is my understanding generally correct? (see below withdrawal possibility)

Q2) Am I right to think that "maybe" it's a good idea to take my non-cola pension in lump sump (~$750k) and invest it in a conservative Vanguard IRA? My thinking is that in addition to not having an eligible surviving benefactor, I could self regulate my overall IRA withdrawals to maintain 0% tax on taxable account...at least until SS and RMD's kick in?

I appreciate your input.

$15,000 Qualified Dividends/LT Cap Gains
$50,600 IRA (traditional 401k)

$12,000 standard deduction
$38,600 taxable

$953 10% tax
$3,489 12% tax
$4,442 total tax

$61,158 Annual take home
$5,097 Monthly take home
Welcome.

Unfortunately, your thinking is not correct. Your $15k in QD/LTCG are part of the $38,600 total of taxable income limit that you must be under in order to enjoy the 0% rate on QD/LTCG.

The other thing that does not make sense is your statement that you are in the 28% tax bracket. We don't have that tax bracket any more, but that kind of income would put you way over the limit of getting your QD and LTCP taxed at 0%.

If you will continue to have about $61k in salary + taking about $50k from the IRA + the $15k QD and LTCG.....you'll be way over the $38,600 limit.

It seems you are thinking the 0% rate is tied to how much you take from IRA. It is not. It is tied to total taxable income. Yours will be too high.

Marsh45
Posts: 10
Joined: Sun Jan 21, 2018 1:48 pm

Re: Flying Under Uncle Sam's Radar?

Post by Marsh45 » Sat Feb 03, 2018 4:24 pm

retiredjg wrote:
Sat Feb 03, 2018 3:20 pm
Marsh45 wrote:
Sat Feb 03, 2018 2:32 pm
Newbie here. Am I missing something?

My understanding is that with the 2018 tax law changes, as long as I pull less than $38,600 retirement income (after standard deduction) out of my IRA accounts, my qualifying dividends/LT cap gains earned in my taxable brokerage account are taxed at 0%.

I'm 52, single, 28% tax bracket, no state tax, with ~$500k in tax deferred (401k, Roth, Inherited IRA), ~$950k in taxable. I have no debt and am planning to retire at 55 at which time I'm eligible to take a pension.

Q1) Is my understanding generally correct? (see below withdrawal possibility)

Q2) Am I right to think that "maybe" it's a good idea to take my non-cola pension in lump sump (~$750k) and invest it in a conservative Vanguard IRA? My thinking is that in addition to not having an eligible surviving benefactor, I could self regulate my overall IRA withdrawals to maintain 0% tax on taxable account...at least until SS and RMD's kick in?

I appreciate your input.

$15,000 Qualified Dividends/LT Cap Gains
$50,600 IRA (traditional 401k)

$12,000 standard deduction
$38,600 taxable

$953 10% tax
$3,489 12% tax
$4,442 total tax

$61,158 Annual take home
$5,097 Monthly take home
Welcome.

Unfortunately, your thinking is not correct. Your $15k in QD/LTCG are part of the $38,600 total of taxable income limit that you must be under in order to enjoy the 0% rate on QD/LTCG.

The other thing that does not make sense is your statement that you are in the 28% tax bracket. We don't have that tax bracket any more, but that kind of income would put you way over the limit of getting your QD and LTCP taxed at 0%.

If you will continue to have about $61k in salary + taking about $50k from the IRA + the $15k QD and LTCG.....you'll be way over the $38,600 limit.

It seems you are thinking the 0% rate is tied to how much you take from IRA. It is not. It is tied to total taxable income. Yours will be too high.
Thank you, I see my error (I think)...

More accurately, I am working currently and in the 24% tax bracket (Single: $82,501 - $157,500). When I retire in 3 years, I will have no income from work, only distributions from IRA's and taxable brokerage.

AS far as Q1), if I retire in 2021, based on 2018 tax law, would I be correct to believe that the $15k in QD/LTCG (shown below) would be taxed at 0%?

$15,000 Qualified Dividends/LT Cap Gains
+$35,600 IRA (traditional 401k)
-$12,000 standard deduction
$38,600 (Income limit for 0% QD/LTCG)

retiredjg
Posts: 34397
Joined: Thu Jan 10, 2008 12:56 pm

Re: Flying Under Uncle Sam's Radar?

Post by retiredjg » Sat Feb 03, 2018 4:37 pm

Marsh45 wrote:
Sat Feb 03, 2018 4:24 pm
AS far as Q1), if I retire in 2021, based on 2018 tax law, would I be correct to believe that the $15k in QD/LTCG (shown below) would be taxed at 0%?

$15,000 Qualified Dividends/LT Cap Gains
+$35,600 IRA (traditional 401k)
-$12,000 standard deduction
$38,600 (Income limit for 0% QD/LTCG)
Yes. And the next $1 of QD/LTCG would be taxed at 15%.

Of course, the limits and standard deduction will change by then, but you've got the right idea.

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BL
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Re: Flying Under Uncle Sam's Radar?

Post by BL » Sat Feb 03, 2018 5:06 pm

My opinion is that the default should be to take the pension, unless there are good reasons not to do so.
Since it doesn't sound like you have someone else needing that pension, you could have that guaranteed income for as long as you live, with no market risk, no risk from eventual poor decisions in older age or someone scamming you out of your money as you grow old. That safety is worth a lot.

One quick check on the value of your pension: compare it to a SPIA (single premium immediate annuity) at immediateAnnuities.com for someone your age and in your state. If it is better than the SPIA, at least they are offering you a decent deal. That would be another push toward getting the pension. If fairly close, it could still be worthwhile to avoid the lump sum.

There is no sure way of knowing which was the best decision, except in hindsight. If/when the markets crash, you will be glad you have the pension. I really like a pension coming in, and I don't care whether a lump sum, if it were available, would have been a better deal. Delaying SS is another way of "buying" a smaller COLAd annuity.

Marsh45
Posts: 10
Joined: Sun Jan 21, 2018 1:48 pm

Re: Flying Under Uncle Sam's Radar?

Post by Marsh45 » Sat Feb 03, 2018 5:30 pm

retiredjg wrote:
Sat Feb 03, 2018 4:37 pm
Marsh45 wrote:
Sat Feb 03, 2018 4:24 pm
AS far as Q1), if I retire in 2021, based on 2018 tax law, would I be correct to believe that the $15k in QD/LTCG (shown below) would be taxed at 0%?

$15,000 Qualified Dividends/LT Cap Gains
+$35,600 IRA (traditional 401k)
-$12,000 standard deduction
$38,600 (Income limit for 0% QD/LTCG)
Yes. And the next $1 of QD/LTCG would be taxed at 15%.

Of course, the limits and standard deduction will change by then, but you've got the right idea.
retiredlg - Thank you for your input. I appreciate it!

Marsh45
Posts: 10
Joined: Sun Jan 21, 2018 1:48 pm

Re: Flying Under Uncle Sam's Radar?

Post by Marsh45 » Sat Feb 03, 2018 5:43 pm

BL wrote:
Sat Feb 03, 2018 5:06 pm
My opinion is that the default should be to take the pension, unless there are good reasons not to do so.
Since it doesn't sound like you have someone else needing that pension, you could have that guaranteed income for as long as you live, with no market risk, no risk from eventual poor decisions in older age or someone scamming you out of your money as you grow old. That safety is worth a lot.

One quick check on the value of your pension: compare it to a SPIA (single premium immediate annuity) at immediateAnnuities.com for someone your age and in your state. If it is better than the SPIA, at least they are offering you a decent deal. That would be another push toward getting the pension. If fairly close, it could still be worthwhile to avoid the lump sum.

There is no sure way of knowing which was the best decision, except in hindsight. If/when the markets crash, you will be glad you have the pension. I really like a pension coming in, and I don't care whether a lump sum, if it were available, would have been a better deal. Delaying SS is another way of "buying" a smaller COLAd annuity.
BL - I appreciate your perspective. I imagine like many here, in amongst working, raising a family, helping kids with college, etc. I've tried to be somewhat frugal and save like crazy. I'm amazed at what there is to learn with regard to withdrawal strategies.

I will look at SPIA (single premium immediate annuity) at immediateAnnuities.com.

Thanks a bunch!

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Flobes
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Joined: Tue Feb 16, 2010 12:40 am

Re: Flying Under Uncle Sam's Radar?

Post by Flobes » Sat Feb 03, 2018 5:53 pm

Marsh45 wrote:
Sat Feb 03, 2018 2:32 pm
Newbie here. Am I missing something?

...with ~$ in tax deferred (... Inherited IRA)...
Your income estimates do not include the RMDs from your Inherited IRA.

Marsh45
Posts: 10
Joined: Sun Jan 21, 2018 1:48 pm

Re: Flying Under Uncle Sam's Radar?

Post by Marsh45 » Sat Feb 03, 2018 6:05 pm

Flobes wrote:
Sat Feb 03, 2018 5:53 pm
Marsh45 wrote:
Sat Feb 03, 2018 2:32 pm
Newbie here. Am I missing something?

...with ~$ in tax deferred (... Inherited IRA)...
Your income estimates do not include the RMDs from your Inherited IRA.
Flobes - You're right, for me that's currently about $1100 in annual income that I'll have to consider. Thanks for your input!

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Flying Under Uncle Sam's Radar?

Post by retiredjg » Sat Feb 03, 2018 6:11 pm

Since you are currently 52.....considering RMDs as income might be a little premature.😊

On the other hand, you might decide to actively try to reduce or prevent RMDs by doing Roth conversions each year and not cashing in on those QD/LTCGs.

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Flobes
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Re: Flying Under Uncle Sam's Radar?

Post by Flobes » Sat Feb 03, 2018 6:33 pm

retiredjg wrote:
Sat Feb 03, 2018 6:11 pm
Since you are currently 52.....considering RMDs as income might be a little premature.😊
OP has an Inherited IRA, already subject to RMDs now. Those RMDs are part of current income considerations.

retiredjg
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Re: Flying Under Uncle Sam's Radar?

Post by retiredjg » Sat Feb 03, 2018 6:46 pm

Thanks. Guess I skimmed over that part. :?

Marsh45
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Joined: Sun Jan 21, 2018 1:48 pm

Re: Flying Under Uncle Sam's Radar?

Post by Marsh45 » Sat Feb 03, 2018 6:51 pm

retiredjg wrote:
Sat Feb 03, 2018 6:11 pm

On the other hand, you might decide to actively try to reduce or prevent RMDs by doing Roth conversions each year and not cashing in on those QD/LTCGs.
Sorry, I'm not following. Would you elaborate?

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jmndu99
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Re: Flying Under Uncle Sam's Radar?

Post by jmndu99 » Sat Feb 03, 2018 7:30 pm

DELETED

retiredjg
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Re: Flying Under Uncle Sam's Radar?

Post by retiredjg » Sat Feb 03, 2018 7:45 pm

If you expect your RMDs from your personal IRA/401k/etc. to be large when you do reach RMD age, you could go ahead and convert some each year to Roth IRA.

Some people can foresee that RMDs will push them into a higher tax bracket in their 70's. Rather than let that happen, they will do Roth conversions earlier, say up to the top of a certain tax bracket.

There's more to it, but there are many threads about this subject if you want to look for them.

Marsh45
Posts: 10
Joined: Sun Jan 21, 2018 1:48 pm

Re: Flying Under Uncle Sam's Radar?

Post by Marsh45 » Sat Feb 03, 2018 7:49 pm

retiredjg wrote:
Sat Feb 03, 2018 7:45 pm
If you expect your RMDs from your personal IRA/401k/etc. to be large when you do reach RMD age, you could go ahead and convert some each year to Roth IRA.

Some people can foresee that RMDs will push them into a higher tax bracket in their 70's. Rather than let that happen, they will do Roth conversions earlier, say up to the top of a certain tax bracket.

There's more to it, but there are many threads about this subject if you want to look for them.
I understand. I'll do some research on the subject. Thank You!

retiredjg
Posts: 34397
Joined: Thu Jan 10, 2008 12:56 pm

Re: Flying Under Uncle Sam's Radar?

Post by retiredjg » Sat Feb 03, 2018 7:56 pm

Here's a place to start. There are other good ones as well.

viewtopic.php?t=170477

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WoodSpinner
Posts: 523
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Re: Flying Under Uncle Sam's Radar?

Post by WoodSpinner » Sat Feb 03, 2018 9:22 pm

Marsh43,

The annuity/limp sum decision is a really difficult one and depends a great deal on personal circumstances. We recently had a detailed thread on the analytics of the decision that might be helpful.

viewtopic.php?t=236087

In addition, this Kitces article is worth reviewing, https://www.kitces.com/blog/how-to-eval ... imization/

Good luck

WoodSpinner

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