Opening retirement accounts after age 70

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fyre4ce
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Opening retirement accounts after age 70

Post by fyre4ce » Mon Sep 16, 2019 4:31 pm

A friend of mine is in his early 70's, living in a moderate income tax state, has worked consulting for a long time as a sole proprietor, and continues to work with an expected retirement around age 80. He's never used tax-advantaged accounts, which I think was a mistake. Annual net business income is about $50k, although can vary somewhat. All his investing so far has been in taxable accounts, and mostly individual stocks. Taxable account value is about $400k with about $150k of unrealized gains, and about $50k of capital loss carryover from previous years. Receiving about $25k of annual SS payments. Health is good and could easily live well into 90's.

Let's put aside the individual stocks and 100% stock allocation for a moment. I recommended selling as many taxable investments as possible to use up the capital loss carryover, starting with the shares with the smallest unrealized gains, and (despite age) trying to shuffle as much money as possible into tax-advantaged accounts. I suggested a Solo 401k at ETrade, with Traditional and Roth sub-accounts, and a Roth IRA. From what I read, it's not possible to open a Traditional IRA after age 70.5, so on the IRA side a Roth is the only option, but I can't see any downsides to shuffling money from taxable to Roth, up to the $7k/year limit. On the 401k side, there seem to be tax advantages to both Traditional and Roth Solo 401k contributions. The only disadvantage I see is that a Solo 401k has RMDs, even while working, so this is an extra transaction that must take place per year, plus a small percentage comes back, effectively lowering the contribution limit slightly. Are there any snags here I'm not seeing? Also, I know Roth IRAs don't have RMDs, so is it possible to contribute to the Roth sub-account of the Solo 401k and immediately roll it over to a Roth IRA to avoid RMDs? I haven't been able to find an answer.

cochlearboy
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Re: Opening retirement accounts after age 70

Post by cochlearboy » Tue Sep 17, 2019 11:41 am

I know that you said that your friend is in good health. But, the older you get, the easier it is for your health to abruptly decline at some point. An illness like pneumonia can be a "flash point," that causes the body to just break down. I have personally seen this myself in my grandparents.

Given his age, I would absolutely buy bonds - maybe a 40-60 allocation of stocks to bonds, with the bonds in the 401k accounts.

You didn't mention any dependents or children, but if he wishes to pass along an inheritance - he could try a "stretch IRA"

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fyre4ce
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Re: Opening retirement accounts after age 70

Post by fyre4ce » Tue Sep 17, 2019 3:11 pm

One area where health comes into play would be realizing the capital gains in the taxable account. If he had a short life expectancy I would recommend holding onto those unrealized gains, although the capital loss doesn't pass to heirs so it would be good to at least cancel out $50k of gains by using the loss now. The question of whether to leave money in taxable or shuffle it into a Solo 401k and Roth IRA does, I think, depend partly on a good life expectancy. I agree that IRAs will have an advantage for estate planning, but this depends on living and working long enough to get a significant amount of money in there.

I will try to influence to scale back on the percentage of stocks and move more toward index funds; shuffling money around might help with this.

My concern is mostly about the mechanics of opening two retirement accounts after RMD age. The Roth IRA should be easy because it has no RMDs, but the Solo 401k will add an extra layer of complexity, and I want to make sure I'm not missing something as to why this could be a good idea.

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celia
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Re: Opening retirement accounts after age 70

Post by celia » Tue Sep 17, 2019 3:30 pm

Your friend doesn’t sound like tax-deferred accounts would be of any benefit to him as he/she is already in a low tax bracket. But Roth IRAs would be good since the same taxes would be paid whether he put the money into taxable or into Roth. Then the Roth account can grow tax-free. Of course, he also needs to realize there is a five-year waiting period before he withdraws, unless he wants to do the calcs to separate contribution vs growth.

I would also hesitate to use up the long term losses. He should wait until he has to sell something, then use it up. Of course, even if he doesn’t sell anything, he would be applying $3,000 of it against other income each year.

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fyre4ce
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Re: Opening retirement accounts after age 70

Post by fyre4ce » Tue Sep 17, 2019 4:36 pm

celia wrote:
Tue Sep 17, 2019 3:30 pm
Your friend doesn’t sound like tax-deferred accounts would be of any benefit to him as he/she is already in a low tax bracket. But Roth IRAs would be good since the same taxes would be paid whether he put the money into taxable or into Roth. Then the Roth account can grow tax-free. Of course, he also needs to realize there is a five-year waiting period before he withdraws, unless he wants to do the calcs to separate contribution vs growth.

I would also hesitate to use up the long term losses. He should wait until he has to sell something, then use it up. Of course, even if he doesn’t sell anything, he would be applying $3,000 of it against other income each year.
I take your point about the value of tax-deferred, although I tried to run some numbers and his marginal tax rate might actually not be that low, due to phase-in of Social Security. Keeping taxable income under the 12%/22% boundary saves quite a bit of taxes, on both earned income and capital gains.

Also, a Solo 401k at Etrade supports Roth contributions, so $25k/year can be contributed Roth there, plus another $7k in the Roth IRA. This seems worth the trouble of opening the Solo 401k, even without deferring any taxes.

I agree it might be best to save as much of the carryover losses as possible, but with high retirement account contributions, selling some taxable assets with gains may be necessary just to meet living expenses.

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steve roy
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Re: Opening retirement accounts after age 70

Post by steve roy » Tue Sep 17, 2019 5:20 pm

He should set up a tax advantaged account and put contributions (50/50) into Wellesley and LifeStrategy Conservative Growth.

retiringwhen
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Re: Opening retirement accounts after age 70

Post by retiringwhen » Tue Sep 17, 2019 6:29 pm

fyre4ce wrote:
Tue Sep 17, 2019 3:11 pm
I agree that IRAs will have an advantage for estate planning, but this depends on living and working long enough to get a significant amount of money in there.
I would suggest moving funds into a Roth IRA only so as to not pass on a tax obligation to the heirs. For one thing, I don't believe you can contribute to a Traditional IRA after age 70.5. Also, the "Stretch" is not a given, and considering that the investor does not appear to have very high marginal taxes, it is likely that paying taxes now may be advantageous for both the investor and his heirs.

Finally, passing on funds in a taxable account with stepped up basis is a very very good way to send money off to the next generation.


Of course using up the carryover losses to lock them in as part of any portfolio cleanup is likely a good idea as well.

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fyre4ce
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Re: Opening retirement accounts after age 70

Post by fyre4ce » Wed Sep 18, 2019 12:28 am

retiringwhen wrote:
Tue Sep 17, 2019 6:29 pm
fyre4ce wrote:
Tue Sep 17, 2019 3:11 pm
I agree that IRAs will have an advantage for estate planning, but this depends on living and working long enough to get a significant amount of money in there.
I would suggest moving funds into a Roth IRA only so as to not pass on a tax obligation to the heirs. For one thing, I don't believe you can contribute to a Traditional IRA after age 70.5. Also, the "Stretch" is not a given, and considering that the investor does not appear to have very high marginal taxes, it is likely that paying taxes now may be advantageous for both the investor and his heirs.

Finally, passing on funds in a taxable account with stepped up basis is a very very good way to send money off to the next generation.


Of course using up the carryover losses to lock them in as part of any portfolio cleanup is likely a good idea as well.
Why do you say a Stretch is not a given?

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