Tax bomb at 70 1/2

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Mikle
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Tax bomb at 70 1/2

Post by Mikle » Tue Nov 15, 2016 5:55 pm

Postponing SS til 70 and RMDs at 70 1/2. Is there any strategies to lessen the tax pain coming?

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Kalo
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Re: Tax bomb at 70 1/2

Post by Kalo » Tue Nov 15, 2016 5:59 pm

How old are you? What tax bracket are you in now and will you be in at 70 1/2? You can convert TIRAs (Traditional) to RIRAs (Roth). The Wiki discusses. Depending on your age and brackets it could be a good strategy.

Kalo
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Re: Tax bomb at 70 1/2

Post by jebmke » Tue Nov 15, 2016 6:00 pm

Kalo wrote:How old are you? What tax bracket are you in now and will you be in at 70 1/2? You can convert TIRAs (Traditional) to RIRAs (Roth). The Wiki discusses. Depending on your age and brackets it could be a good strategy.

Kalo
We are converting some TIRA to Roth.

Also, once you start taking RMDs you can give it away.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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catdude
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Re: Tax bomb at 70 1/2

Post by catdude » Tue Nov 15, 2016 6:01 pm

Kalo, you beat me to it... I was just gonna say exactly what you said...

OP, I'm 61 and in the 15% tax bracket. For the next 10 years, I'm going to convert $10k per year from my traditional IRA to my Roth. I'm converting to the top of the 15% bracket. You may want to consider following this strategy for yourself.
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David Jay
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Re: Tax bomb at 70 1/2

Post by David Jay » Tue Nov 15, 2016 6:03 pm

1. Make Roth conversions, up to the top of the (xx) tax bracket in the years after retirement (where xx is the bracket BELOW where you will end up when you hit your highest RMD amount). You can continue to do that after age 70 (although you have to take the RMD first each year). In my case, I will be able to convert a few thousand each year after 70 1/2 without making my SS taxable as long as we are still MFJ (after one spouse passes it changes).

2. If you are making significant charitable donations, you can make those as QCDs after 70 1/2 to count against your RMD but not count as taxable income. If you live a simple lifestyle this can keep you out of the SS hump.
Last edited by David Jay on Tue Nov 15, 2016 6:16 pm, edited 1 time in total.
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Re: Tax bomb at 70 1/2

Post by clydewolf » Tue Nov 15, 2016 6:07 pm

David Jay wrote: 2. If you are making significant charitable donations, you can make those as QCDs after 70 1/2 to count against your RMD but not count as taxable income. If you live a simple lifestyle this can keep you out of the SS hump.
+1

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Re: Tax bomb at 70 1/2

Post by FillorKill » Tue Nov 15, 2016 6:11 pm

Lowest expected returning assets in traditional space, highest in ROTH, TLH aggressively, spending out of the taxable account prior to SS/RMD to keep the distribution income in check....

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Re: Tax bomb at 70 1/2

Post by FillorKill » Tue Nov 15, 2016 6:23 pm

...deduction bundling to produce alternating higher v lower taxable income years. High deduction/lower taxable income years augment income from high tax sources - traditional space. Higher income years draw from ROTH &/or take highest cost basis cap gains washed against loss carryforwards....

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Watty
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Re: Tax bomb at 70 1/2

Post by Watty » Tue Nov 15, 2016 7:32 pm

Be sure to do a dummy tax return to see what the actual taxes will be. People sometimes overestimate what the impact will be.

The tax effective tax rates in the "hump" are high but you may very well get through that pretty quick so in dollar terms it might not be as bad as it sounds when you look at your overall effective tax rate.

The RMD's start out at less than 4% and if that is a big tax problem for you then you may be facing more important estate tax issues so be sure to look into that.

For your heirs there is a "silver lining" to taking an unneeded RMD. That is the unneeded money could be invested in a taxable account for several decades and grow a lot. You heirs would inherit it at a stepped up cost basis which would save them future taxes.
Last edited by Watty on Tue Nov 15, 2016 8:05 pm, edited 1 time in total.

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munemaker
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Re: Tax bomb at 70 1/2

Post by munemaker » Tue Nov 15, 2016 7:34 pm

Mikle wrote:Postponing SS til 70 and RMDs at 70 1/2. Is there any strategies to lessen the tax pain coming?
Start taking your RMD earlier to average it out over more years.

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Mikle
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Re: Tax bomb at 70 1/2

Post by Mikle » Tue Nov 15, 2016 7:51 pm

A lot of good ideas for me to explore. I am 64 and have run Bankrate's IRA conversion calculator. It determined no benefit to total conversion but will do some more number crunching.

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David Jay
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Re: Tax bomb at 70 1/2

Post by David Jay » Tue Nov 15, 2016 8:38 pm

Mikle wrote:A lot of good ideas for me to explore. I am 64 and have run Bankrate's IRA conversion calculator. It determined no benefit to total conversion but will do some more number crunching.
I don't know this calculator but I have yet to see a calculator that attempts to calculate my tIRA future balance and determine how large my RMD will grow in our later years. Because the RMD is based on life expectancy, the percent of remaining portfolio increases each year (5.3% of balance at age 80, 9.3% of balance at age 90).
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Mikle
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Re: Tax bomb at 70 1/2

Post by Mikle » Tue Nov 15, 2016 9:02 pm


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Re: Tax bomb at 70 1/2

Post by Spirit Rider » Tue Nov 15, 2016 9:20 pm

David Jay wrote:
Mikle wrote:A lot of good ideas for me to explore. I am 64 and have run Bankrate's IRA conversion calculator. It determined no benefit to total conversion but will do some more number crunching.
I don't know this calculator but I have yet to see a calculator that attempts to calculate my tIRA future balance and determine how large my RMD will grow in our later years. Because the RMD is based on life expectancy, the percent of remaining portfolio increases each year (5.3% of balance at age 80, 9.3% of balance at age 90).
This is the key. It is not just a comparison of what the tax rate you will be with the RMD in the year your turn 70 1/2. Since the RMD divisor decreases every year the RMDs will accelerate.

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dodecahedron
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Re: Tax bomb at 70 1/2

Post by dodecahedron » Tue Nov 15, 2016 9:37 pm

Spirit Rider wrote: This is the key. It is not just a comparison of what the tax rate you will be with the RMD in the year your turn 70 1/2. Since the RMD divisor decreases every year the RMDs will accelerate.
Accelerate seems the wrong word to describe what RMDs do. RMDs may increase modestly for a few years (i.e., positive first derivative) but unless the investment is growing at a considerable rate, the second derivative of the RMDs is likely to be negative, and the first derivative may eventually be negative as well. The reason is that yes, the RMD divisor is decreasing, but taking distributions also decreases the RMD numerator (the balance in the asset).

Check out Kitces' graph of RMDs over time: http://www.bankinvestmentconsultant.com ... er-run-dry

Also note that his graph is in nominal terms. If adjusted for inflation, the RMD trajectory could be even more attenuated than shown. Adjusting for inflation is particularly appropriate in this context, since most provisions of the tax code are automatically adjusted for inflation.


I need to correct this. I was in error last night when I posted this. Will post correction below.
Last edited by dodecahedron on Wed Nov 16, 2016 11:32 am, edited 1 time in total.

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Re: Tax bomb at 70 1/2

Post by jimb_fromATL » Tue Nov 15, 2016 9:41 pm

As a matter of curiosity, what do you consider to be a "tax bomb" ?

What are your top tax brackets for federal and state now?
What do you expect them to be with RMDs?
Are you retired now? If so, what were your top tax brackets when you were working?

Do you expect your RMDs to be so high that they will cause you to pay a higher tax bracket on all of your withdrawals than you got to defer in your highest bracket(s) during your accumulation years?

Did you get to defer state income tax when you were working? If so, are any of your retirement withdrawals exempt from state tax?

jimb

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Re: Tax bomb at 70 1/2

Post by randomguy » Tue Nov 15, 2016 9:42 pm

Watty wrote: For your heirs there is a "silver lining" to taking an unneeded RMD. That is the unneeded money could be invested in a taxable account for several decades and grow a lot. You heirs would inherit it at a stepped up cost basis which would save them future taxes.
The stepped up cost basis just gets them back to even. Look at 100k. 25% tax bracket, money goes up 10x

Taxable distribution: 75k*10x= 750k
tax deferred: 100k*10x= 1.0 million*.25% for taxes = 750k

Same spot:) Now if your heirs are richer/poorer things work out different. And the inherited IRA money can keep compounding tax free to some extend for say another 20-30 years. The taxable account can be spend all at once. I would call it a tin lining at best:)

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Re: Tax bomb at 70 1/2

Post by randomguy » Tue Nov 15, 2016 9:56 pm

dodecahedron wrote:
Spirit Rider wrote: This is the key. It is not just a comparison of what the tax rate you will be with the RMD in the year your turn 70 1/2. Since the RMD divisor decreases every year the RMDs will accelerate.
Accelerate seems the wrong word to describe what RMDs do. RMDs may increase modestly for a few years (i.e., positive first derivative) but unless the investment is growing at a considerable rate, the second derivative of the RMDs is likely to be negative, and the first derivative may eventually be negative as well. The reason is that yes, the RMD divisor is decreasing, but taking distributions also decreases the RMD numerator (the balance in the asset).

Check out Kitces' graph of RMDs over time: http://www.bankinvestmentconsultant.com ... er-run-dry

Also note that his graph is in nominal terms. If adjusted for inflation, the RMD trajectory could be even more attenuated than shown. Adjusting for inflation is particularly appropriate in this context, since most provisions of the tax code are automatically adjusted for inflation.
I like how the guy talks about 5% inflation and thinks 3% is a low estimate. It brings back 80s flashbacks.

Schawab has an RMD calculator where you can put in your return estimate and see how RMDs grow in nominal terms
http://www.schwab.com/public/schwab/inv ... lators/rmd

As a rough approximation, you tend to get a max RMD of about 2.5x the starting one about 15 years in. The exact number shifts a bit with returns. To get explosive RMD growth you need to be having 10%+ returns (one site used ~14% a while back to have someone move from the 25% bracket in year 1 to 39% in year 25). You can get a pretty big tax growth though when a partner dies.

Simple example. 20k SS for one 10k spousal for the other. 80k RMD
together: 110k of income: 12.1k in taxes
Alone: 100k of income: 16.6k in taxes

10k less income. 4.5k more in taxes

Miriam2
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Re: Tax bomb at 70 1/2

Post by Miriam2 » Wed Nov 16, 2016 1:34 am

There is interesting information on your topic in this thread:

viewtopic.php?f=10&t=156313 - Surviving the Tax Bite of RMD Withdrawals in Retirement

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Re: Tax bomb at 70 1/2

Post by White Coat Investor » Wed Nov 16, 2016 1:47 am

Mikle wrote:Postponing SS til 70 and RMDs at 70 1/2. Is there any strategies to lessen the tax pain coming?
Roth conversions is the main one. You can also give to charity early anything you planned to leave at your death.

But think of it this way- what an awesome problem to have! You have so much income that the taxes on it are huge! Many, many retirees would like to have your first world problem. I mean, if SS is paying you $30K, how big of a tax deferred nest egg does a married couple have to have in order to have their age 70 RMDs push them into the highest bracket? About $13 Million. Just to get into the 28% bracket you need a tax deferred nest egg of $3.6 Million or so. Well done I say! Well done! Enjoy the fruits of your labor. Pay your taxes and spend some moola on whatever makes you happy.
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Re: Tax bomb at 70 1/2

Post by catdude » Wed Nov 16, 2016 1:52 am

munemaker wrote:
Mikle wrote:Postponing SS til 70 and RMDs at 70 1/2. Is there any strategies to lessen the tax pain coming?
Start taking your RMD earlier to average it out over more years.
Interesting idea, I hadn't thought of that... :oops:
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BL
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Re: Tax bomb at 70 1/2

Post by BL » Wed Nov 16, 2016 8:39 am

Keep maximum fixed income in IRA to slow down growth there.
QCDs for charity, early Roth conversions (I would say that is better to inherit than tIRA.)

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Re: Tax bomb at 70 1/2

Post by Nowizard » Wed Nov 16, 2016 9:49 am

Ed Slott's book on the retirement savings time bomb may be helpful.

Tim

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Re: Tax bomb at 70 1/2

Post by House Blend » Wed Nov 16, 2016 11:16 am

johnny wrote:
munemaker wrote:
Mikle wrote:Postponing SS til 70 and RMDs at 70 1/2. Is there any strategies to lessen the tax pain coming?
Start taking your RMD earlier to average it out over more years.
Interesting idea, I hadn't thought of that... :oops:
This is bad advice.

If it makes sense to take money out of your tax-deferred IRA that is not required and not needed to cover expenses, it makes even more sense to convert that money to Roth.

Also, if the amounts are small, it won't make much difference for future RMDs--taking 1% out in early retirement (before 70.5) will only reduce future RMDs by 1%.

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munemaker
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Re: Tax bomb at 70 1/2

Post by munemaker » Wed Nov 16, 2016 11:29 am

House Blend wrote:
johnny wrote:
munemaker wrote:
Mikle wrote:Postponing SS til 70 and RMDs at 70 1/2. Is there any strategies to lessen the tax pain coming?
Start taking your RMD earlier to average it out over more years.
Interesting idea, I hadn't thought of that... :oops:
This is bad advice.

If it makes sense to take money out of your tax-deferred IRA that is not required and not needed to cover expenses, it makes even more sense to convert that money to Roth.

Also, if the amounts are small, it won't make much difference for future RMDs--taking 1% out in early retirement (before 70.5) will only reduce future RMDs by 1%.
I agree.

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dodecahedron
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Re: Tax bomb at 70 1/2

Post by dodecahedron » Wed Nov 16, 2016 11:50 am

Spirit Rider wrote:
David Jay wrote:
Mikle wrote:A lot of good ideas for me to explore. I am 64 and have run Bankrate's IRA conversion calculator. It determined no benefit to total conversion but will do some more number crunching.
I don't know this calculator but I have yet to see a calculator that attempts to calculate my tIRA future balance and determine how large my RMD will grow in our later years. Because the RMD is based on life expectancy, the percent of remaining portfolio increases each year (5.3% of balance at age 80, 9.3% of balance at age 90).
This is the key. It is not just a comparison of what the tax rate you will be with the RMD in the year your turn 70 1/2. Since the RMD divisor decreases every year the RMDs will accelerate.
Having thought through more carefully, I now agree with spirit rider that, without careful management (e.g., by careful Roth conversions), RMDs may accelerate during the seventies decade, at least if there is enough portfolio growth to outrun the distributions. (An IRA invested in bonds may not have shown this pattern in recent years, however, due to current historically low interest rates.)

The Kitces graph I previously linked to above was completely inapt for illustrating the scenario I had in mind. The one here shows the acceleration pattern Spirit Rider described, though it does assume that investments grow at 8% return, which is pretty aggressive/optimistic. However, even under this 8% assumption, careful partial Roth conversions can pretty much get rid of the acceleration (the second derivative is essentially nonnegative throughout the RMD period in the second graph.)

For tax-deferred investments like my own (invested in TIAA Traditional with a 3% return), I am not particularly worried about accelerating RMDs. (Then again, I have already converted slightly more than half my tax advantaged to Roth, am planning significant charitable donations, and expect to work part-time into my 70s, which further defers the RMDs on my 403b and gives additional time for Roth contributions and Roth conversions.) So RMDs are at least eight years away for me, and hopefully longer.

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Re: Tax bomb at 70 1/2

Post by dodecahedron » Wed Nov 16, 2016 11:52 am

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Re: Tax bomb at 70 1/2

Post by David Jay » Wed Nov 16, 2016 12:19 pm

House Blend wrote:
johnny wrote:
munemaker wrote:
Mikle wrote:Postponing SS til 70 and RMDs at 70 1/2. Is there any strategies to lessen the tax pain coming?
Start taking your RMD earlier to average it out over more years.
Interesting idea, I hadn't thought of that... :oops:
This is bad advice.

If it makes sense to take money out of your tax-deferred IRA that is not required and not needed to cover expenses, it makes even more sense to convert that money to Roth.

Also, if the amounts are small, it won't make much difference for future RMDs--taking 1% out in early retirement (before 70.5) will only reduce future RMDs by 1%.
Absolutely agree.

The tax burden is exactly the same to take it out as to convert it to Roth.

If you convert it to Roth, all future gains are tax free. You have complete access to that money at any time without penalty (assuming age 59.5 and the initial 5 year clock has expired).
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Re: Tax bomb at 70 1/2

Post by dodecahedron » Wed Nov 16, 2016 12:26 pm

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Mikle
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Re: Tax bomb at 70 1/2

Post by Mikle » Wed Nov 16, 2016 12:52 pm

White Coat Investor wrote:
Mikle wrote:Postponing SS til 70 and RMDs at 70 1/2. Is there any strategies to lessen the tax pain coming?
Roth conversions is the main one. You can also give to charity early anything you planned to leave at your death.

But think of it this way- what an awesome problem to have! You have so much income that the taxes on it are huge! Many, many retirees would like to have your first world problem. I mean, if SS is paying you $30K, how big of a tax deferred nest egg does a married couple have to have in order to have their age 70 RMDs push them into the highest bracket? About $13 Million. Just to get into the 28% bracket you need a tax deferred nest egg of $3.6 Million or so. Well done I say! Well done! Enjoy the fruits of your labor. Pay your taxes and spend some moola on whatever makes you happy.
White Coat Investor,
I couldn't agree more and remind myself and spouse of how good it is to have this problem.

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Re: Tax bomb at 70 1/2

Post by Chadnudj » Wed Nov 16, 2016 1:23 pm

White Coat Investor wrote:
Mikle wrote:Postponing SS til 70 and RMDs at 70 1/2. Is there any strategies to lessen the tax pain coming?
Roth conversions is the main one. You can also give to charity early anything you planned to leave at your death.

But think of it this way- what an awesome problem to have! You have so much income that the taxes on it are huge! Many, many retirees would like to have your first world problem. I mean, if SS is paying you $30K, how big of a tax deferred nest egg does a married couple have to have in order to have their age 70 RMDs push them into the highest bracket? About $13 Million. Just to get into the 28% bracket you need a tax deferred nest egg of $3.6 Million or so. Well done I say! Well done! Enjoy the fruits of your labor. Pay your taxes and spend some moola on whatever makes you happy.
This precise rationale is why I think pretty much anyone in the 25% bracket or above, at all times, should max out a traditional 401k instead of a Roth 401k. (Note: they should still do backdoor Roth IRAs, however). Having a massive RMD problem is a pretty decent problem to have in retirement, if you're going to have one (and by using traditional 401k the whole time instead of Roth 401k, the whole time you've been saving up for retirement you would have had more take home pay to spend and enjoy during your pre-retirement years than if you had done the Roth 401k).

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Re: Tax bomb at 70 1/2

Post by Electron » Wed Nov 16, 2016 1:45 pm

I'd also review all other sources of income. You may want to emphasize qualified dividends, capital gains, and tax exempt income rather than ordinary income.

However, we all need to think about any impact from tax reform which could require changes in our planning. Note also that lower marginal tax rates in the future could modestly reduce the benefits of any Roth conversions.

Lastly, if your Social Security income and RMDs provide anything close to your income when working, feel good about it and don't worry about the taxes.
Electron

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Re: Tax bomb at 70 1/2

Post by Good Listener » Wed Nov 16, 2016 5:25 pm

I am almost 64 and have begun starting to plan for the tax bomb as it is being called. I am in the 33% bracket and presumably will be in that bracket or more for the rest of my life. I am going to do ROTH conversations from a 7 figure IRA to the top of the 33% bracket this year. I want to avoid violating board policies, but we face the real possibility of the 33% rate being the maximum for the next several years. If that happens, I am going to bite the bullet and do the entire conversion over 4 years, I believe that given our debt, tax rates will be substantially higher down the road, maybe in less than 10 years.

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Re: Tax bomb at 70 1/2

Post by itstoomuch » Wed Nov 16, 2016 5:58 pm

Mikle wrote:A lot of good ideas for me to explore. I am 64 and have run Bankrate's IRA conversion calculator. It determined no benefit to total conversion but will do some more number crunching.
I ran that calculation too. You may want to take IRA distributions now and bank/invest the proceeds. We had original thought to wait till RMD age but fortunate fortunes and unfortunate fortunes occurred so that we will be taking distributions in 2017 and reallocate the proceeds into taxables or spend it.
YMMV.
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Re: Tax bomb at 70 1/2

Post by jdb » Wed Nov 16, 2016 6:20 pm

Am I the only one offended by the "tax bomb" reference? I have a friend in his mid 80s who complained about paying taxes on his RMD from tax deferred accounts. I said that he had deferred taxes on the monies when earned and contributed and had deferred taxes on the earnings since then, probably was looking at several decades of deferral. Wasn't it time that he paid his fair share? His response was that there should be total tax exemption for anyone over 80 years old. Go figure.

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Re: Tax bomb at 70 1/2

Post by AnnieK » Wed Nov 16, 2016 7:15 pm

Offended? No. Most of us spend a fair bit of time trying to reduce our taxes paid. No reason to stop when we are old.

I will pay all of the taxes that I am legally required to. I will also do everything within my power to reduce that legal obligation as much as possible.

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Re: Tax bomb at 70 1/2

Post by SGM » Wed Nov 16, 2016 7:26 pm

It is foolish to take early RMDs and not convert them to Roth accounts if the funds are not currently needed.

I delayed taking SS until and converted all my tIRAs and 401ks to Roth accounts from 2010 through 2015. The actual conversion is a wash and there is not much advantage for the conversion until many years have passed. But lowering the amount of taxable income by exchanging it by paying taxes for the conversion is a current and ongoing advantage in my taxable account.

At age 70 1/2 I will not have to take out any RMDs and my Roth accounts will continue to have the opportunity to grow untaxed. RMDs and a higher taxable income from a larger taxable account could have increased my tax rate, Medicare premiums, etc.

We will also benefit from somewhat lower taxes if we take capital gains or if one of us predeceases the other and has to pay taxes at a single person's rate.

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Re: Tax bomb at 70 1/2

Post by Ged » Wed Nov 16, 2016 7:45 pm

Doesn't longevity play a role here? If I die before depletion of my IRA my heirs should have much lower RMDs, and possibly be in a lower tax bracket as well. It also may reduce the tax load to pass my IRA to my children rather than to my wife.

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Mikle
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Re: Tax bomb at 70 1/2

Post by Mikle » Wed Nov 16, 2016 8:34 pm

jdb wrote:Am I the only one offended by the "tax bomb" reference? I have a friend in his mid 80s who complained about paying taxes on his RMD from tax deferred accounts. I said that he had deferred taxes on the monies when earned and contributed and had deferred taxes on the earnings since then, probably was looking at several decades of deferral. Wasn't it time that he paid his fair share? His response was that there should be total tax exemption for anyone over 80 years old. Go figure.
I didn't ask for advice on how to avoid paying my share. Nor am I complaining about paying any taxes. Sorry if I offended you.

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Re: Tax bomb at 70 1/2

Post by celia » Wed Nov 16, 2016 8:51 pm

Ged wrote:Doesn't longevity play a role here? If I die before depletion of my IRA my heirs should have much lower RMDs, and possibly be in a lower tax bracket as well.
Maybe or maybe not.

If you live another 30 years, it is likely your heirs will be in a different financial situation than they are now. If you have more than 1 kid, it is possible they are in different tax brackets from each other when you die. You or they may not think it is "fair" that they have to pay different amounts of taxes on the RMDs, thus leaving them with different amounts to spend or invest.
It also may reduce the tax load to pass my IRA to my children rather than to my wife.
Roth conversions now will make your estate be worth less when you die, thus incurring less estate tax (if applicable).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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celia
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Re: Tax bomb at 70 1/2

Post by celia » Wed Nov 16, 2016 9:04 pm

Good Listener wrote:... but we face the real possibility of the 33% rate being the maximum for the next several years. If that happens, I am going to bite the bullet and do the entire conversion over 4 years, I believe that given our debt, tax rates will be substantially higher down the road, maybe in less than 10 years.
I congratulate you on being a LONG TERM planner! Although the future is unknown, it is worth considering the "diversity" of converting in different years (ie, different tax rules).

Also note, that some of your taxable income is taxed at EACH tax bracket. Only the income in the 33% bracket is taxed at 33%. If you wait until 70.5, more of your income will likely be taxed at that rate than now since 85% of SS will take up room in a lower bracket.

You can save on some taxes by attempting to convert when the markets are "down" (and shares are worth less).
Last edited by celia on Wed Nov 16, 2016 9:05 pm, edited 1 time in total.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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dodecahedron
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Re: Tax bomb at 70 1/2

Post by dodecahedron » Wed Nov 16, 2016 9:04 pm

celia wrote:
Ged wrote:Doesn't longevity play a role here? If I die before depletion of my IRA my heirs should have much lower RMDs, and possibly be in a lower tax bracket as well.
Maybe or maybe not.

If you live another 30 years, it is likely your heirs will be in a different financial situation than they are now. If you have more than 1 kid, it is possible they are in different tax brackets from each other when you die. You or they may not think it is "fair" that they have to pay different amounts of taxes on the RMDs, thus leaving them with different amounts to spend or invest.
It also may reduce the tax load to pass my IRA to my children rather than to my wife.
Roth conversions now will make your estate be worth less when you die, thus incurring less estate tax (if applicable).
I have converted slightly over half my tax deferred accounts to Roth, which I hope not to need in my lifetime. My taxable heirs will get my Roth IRA and life insurance proceeds and my taxable accounts with stepped up basis, all tax free. My charitable beneficiaries will get any remaining tax deferred assets as well as any funds remaining in my HSA since they do not care about taxes.

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celia
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Re: Tax bomb at 70 1/2

Post by celia » Wed Nov 16, 2016 9:11 pm

dodecahedron wrote:My taxable heirs will get...

My charitable beneficiaries will get...
How did you get your heirs to be taxable?
How did you get your beneficiaries to be charitable?
:D :D :D

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celia
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Re: Tax bomb at 70 1/2

Post by celia » Wed Nov 16, 2016 9:23 pm

jdb wrote:Am I the only one offended by the "tax bomb" reference? I have a friend in his mid 80s who complained about paying taxes on his RMD from tax deferred accounts. I said that he had deferred taxes on the monies when earned and contributed and had deferred taxes on the earnings since then, probably was looking at several decades of deferral. Wasn't it time that he paid his fair share? His response was that there should be total tax exemption for anyone over 80 years old. Go figure.
I am NOT offended at all about the "tax "bomb" description because that is probably what it feels like to someone who didn't plan for it.

However, I AM offended by your friend's idea that he shouldn't have to pay taxes on any withdrawal from a tax-deferred account. He knew the withdrawals would be taxed when he made the contributions. If he didn't like that idea at that time, he should have contributed to Roth instead! The rules didn't change. He did.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Ged
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Re: Tax bomb at 70 1/2

Post by Ged » Wed Nov 16, 2016 9:34 pm

celia wrote:
Ged wrote:Doesn't longevity play a role here? If I die before depletion of my IRA my heirs should have much lower RMDs, and possibly be in a lower tax bracket as well.
Maybe or maybe not.
Exactly. It's worth considering what the tax rate on your bequest will be. If you are in a high bracket and your children are being taxed at a lower rate aggressive conversion may increase the overall taxation of the IRA.

It's a tricky consideration and depends on a lot of personal factors. If you feel you are likely to live 30 years after retirement it's probably not worth consideration. However if you are not in good health and your children's careers are not flourishing it could be something to think about.

SittingOnTheFence
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Re: Tax bomb at 70 1/2

Post by SittingOnTheFence » Thu Nov 17, 2016 1:16 am

celia wrote:He knew the withdrawals would be taxed when he made the contributions. If he didn't like that idea at that time, he should have contributed to Roth instead! The rules didn't change. He did.
Since he is in his 80's, it is iffy he would have a Roth since the rules you mention didn't start until 1998. And the rules have contribution limits on the Roth based on MAGI. I'm not supporting his statement about not being taxed, only that considering his age he probably could not have contributed, or only contributed very little, to a Roth.

I only have a small Roth because I was able to contribute only in the earlier years of implementation and unable to contribute towards the end of my employment due to restrictions based on income. I put it into TIRA instead because that was the most suitable at that time.

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celia
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Re: Tax bomb at 70 1/2

Post by celia » Thu Nov 17, 2016 4:22 am

SittingOnTheFence wrote:Since he is in his 80's, it is iffy he would have a Roth since the rules you mention didn't start until 1998.
You're right. But he could have taken care of the taxes anytime after that by converting.

But he likely could have the lowest tax bill now (percentage wise). If so, then he is lucky.

jdb
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Re: Tax bomb at 70 1/2

Post by jdb » Thu Nov 17, 2016 10:31 am

Mikle wrote:
jdb wrote:Am I the only one offended by the "tax bomb" reference? I have a friend in his mid 80s who complained about paying taxes on his RMD from tax deferred accounts. I said that he had deferred taxes on the monies when earned and contributed and had deferred taxes on the earnings since then, probably was looking at several decades of deferral. Wasn't it time that he paid his fair share? His response was that there should be total tax exemption for anyone over 80 years old. Go figure.
I didn't ask for advice on how to avoid paying my share. Nor am I complaining about paying any taxes. Sorry if I offended you.
Offended was probably wrong word, should have said I was perplexed by phrase "tax bomb". I have no problem with trying legal tax minimization as do myself but as someone who for better or worse is in 39.6 percent tax bracket paying substantial income taxes every year even after tax planning do not understand how a long deferred ordinary income tax on RMD distributions is any more a "tax bomb" than many millions of us face every April 15th on our taxable earnings.

Parthenon
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Re: Tax bomb at 70 1/2

Post by Parthenon » Thu Nov 17, 2016 11:36 am

For those individuals who are trying to use up space up to the maximum in the 25% federal tax bracket for making traditional IRA conversions to a Roth, don't forget about the $170,000 limit (for married couples) in MAGI before you pay a higher premium for Medicare Part B.

Onto Line 37 of Fed 1040 you will have to add in the 15% portion of Social Security that isn't taxed plus any dividends from tax free investments to arrive at your MAGI. That $170,000 limit isn't indexed for inflation so it will remain at that amount until 2020.

If you are in a higher tax bracket your Medicare B premiums will increase even more.
"What am I gonna do if I run out of money?"

Engineer250
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Re: Tax bomb at 70 1/2

Post by Engineer250 » Thu Nov 17, 2016 12:25 pm

White Coat Investor wrote:
Mikle wrote:Postponing SS til 70 and RMDs at 70 1/2. Is there any strategies to lessen the tax pain coming?
Roth conversions is the main one. You can also give to charity early anything you planned to leave at your death.

But think of it this way- what an awesome problem to have! You have so much income that the taxes on it are huge! Many, many retirees would like to have your first world problem. I mean, if SS is paying you $30K, how big of a tax deferred nest egg does a married couple have to have in order to have their age 70 RMDs push them into the highest bracket? About $13 Million. Just to get into the 28% bracket you need a tax deferred nest egg of $3.6 Million or so. Well done I say! Well done! Enjoy the fruits of your labor. Pay your taxes and spend some moola on whatever makes you happy.
Thanks for saying what I am often thinking in these threads. No one turns down a promotion because it will bump them into the next higher tax bracket. I'm not trying to be rude to OP, just that BH ends up being a pretty odd place of people doing much better than average and trying (rightfully) to optimize their situations, it's just hard for me to wrap my mind around sometimes.
jdb wrote:Am I the only one offended by the "tax bomb" reference? I have a friend in his mid 80s who complained about paying taxes on his RMD from tax deferred accounts. I said that he had deferred taxes on the monies when earned and contributed and had deferred taxes on the earnings since then, probably was looking at several decades of deferral. Wasn't it time that he paid his fair share? His response was that there should be total tax exemption for anyone over 80 years old. Go figure.
Your friend sounds like some people I know. I agree it can be irritating. Typically against any form of aid or welfare or tax breaks...until it benefits them. Complain about paying the social security tax until they are drawing the benefits. Then it's "don't touch MY social security".
Where the tides of fortune take us, no man can know.

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