Reducing Taxes in Retirement

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StartedAt22
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Reducing Taxes in Retirement

Post by StartedAt22 »

Greetings,

My parents are 2 years out from RMD age. They have been drawing social security to the tune of ~$50k / yr . In 2 years, they will be required to take RMDs from an account with about $2MM. They are trying to find ways to reduce their taxes owed on this money, and ultimately, the taxes owed by their heirs on this money (with eyes on the SECURE act).

From my understanding, the golden window for them is basically closed as they are already drawing SS (they started taking in their mid-60's). They've asked me for help and I'm stumped. I basically told them that the math gets more detailed now and they would have to estimate the marginal tax rates of their heirs (whenever they think they will pass), and compare to their marginal tax rates at different withdrawal amounts.

Am I thinking of this correctly? I know there is missing information that will help guide responses, but this is all I have from them.

So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?

Warmest Regards,
D
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anon_investor
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Re: Reducing Taxes in Retirement

Post by anon_investor »

StartedAt22 wrote: Tue Jul 20, 2021 7:18 am Greetings,

My parents are 2 years out from RMD age. They have been drawing social security to the tune of ~$50k / yr . In 2 years, they will be required to take RMDs from an account with about $2MM. They are trying to find ways to reduce their taxes owed on this money, and ultimately, the taxes owed by their heirs on this money (with eyes on the SECURE act).

From my understanding, the golden window for them is basically closed as they are already drawing SS (they started taking in their mid-60's). They've asked me for help and I'm stumped. I basically told them that the math gets more detailed now and they would have to estimate the marginal tax rates of their heirs (whenever they think they will pass), and compare to their marginal tax rates at different withdrawal amounts.

Am I thinking of this correctly? I know there is missing information that will help guide responses, but this is all I have from them.

So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?

Warmest Regards,
D
Maybe some Roth conversions.
Nowizard
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Re: Reducing Taxes in Retirement

Post by Nowizard »

I'm not certain how SS impacts RMD's other than increasing income and taxation as a result. If they have a pension, then that would increase income further, of course. One approach is that with taxation being based on income, there is generally a relationship between the two going up or down together and there is satisfaction in "being able" to pay taxes. At a more practical level related to the question, as a couple in the RMD stage, it does increase federal taxation and can lead to IRMAA increases with Medicare payments as well. Reduction of income related to RMD's occurs primarily in two ways: 1. Donation of the RMD according to IRS guidelines, 2. Conversion of traditional IRA's to Roth-IRA's. There are few ways to reduce AGI once income is received since AGI is measured prior to typical deductions. Others may have a more nuanced response.

Tim
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StartedAt22
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

anon_investor wrote: Tue Jul 20, 2021 7:23 am
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am Greetings,

My parents are 2 years out from RMD age. They have been drawing social security to the tune of ~$50k / yr . In 2 years, they will be required to take RMDs from an account with about $2MM. They are trying to find ways to reduce their taxes owed on this money, and ultimately, the taxes owed by their heirs on this money (with eyes on the SECURE act).

From my understanding, the golden window for them is basically closed as they are already drawing SS (they started taking in their mid-60's). They've asked me for help and I'm stumped. I basically told them that the math gets more detailed now and they would have to estimate the marginal tax rates of their heirs (whenever they think they will pass), and compare to their marginal tax rates at different withdrawal amounts.

Am I thinking of this correctly? I know there is missing information that will help guide responses, but this is all I have from them.

So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?

Warmest Regards,
D
Maybe some Roth conversions.
I did recommend this. They weren't happy there would still be taxes. It is one of those "good problems" to have.
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StartedAt22
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

Nowizard wrote: Tue Jul 20, 2021 7:28 am I'm not certain how SS impacts RMD's other than increasing income and taxation as a result. If they have a pension, then that would increase income further, of course. One approach is that with taxation being based on income, there is generally a relationship between the two going up or down together and there is satisfaction in "being able" to pay taxes. At a more practical level related to the question, as a couple in the RMD stage, it does increase federal taxation and can lead to IRMAA increases with Medicare payments as well. Reduction of income related to RMD's occurs primarily in two ways: 1. Donation of the RMD according to IRS guidelines, 2. Conversion of traditional IRA's to Roth-IRA's. There are few ways to reduce AGI once income is received since AGI is measured prior to typical deductions. Others may have a more nuanced response.

Tim
Thanks Tim. I recommended QCD's as well but that doesn't get more after-tax money in their pocket, or their heirs. (these are their words)

D
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anon_investor
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Re: Reducing Taxes in Retirement

Post by anon_investor »

StartedAt22 wrote: Tue Jul 20, 2021 7:31 am
anon_investor wrote: Tue Jul 20, 2021 7:23 am
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am Greetings,

My parents are 2 years out from RMD age. They have been drawing social security to the tune of ~$50k / yr . In 2 years, they will be required to take RMDs from an account with about $2MM. They are trying to find ways to reduce their taxes owed on this money, and ultimately, the taxes owed by their heirs on this money (with eyes on the SECURE act).

From my understanding, the golden window for them is basically closed as they are already drawing SS (they started taking in their mid-60's). They've asked me for help and I'm stumped. I basically told them that the math gets more detailed now and they would have to estimate the marginal tax rates of their heirs (whenever they think they will pass), and compare to their marginal tax rates at different withdrawal amounts.

Am I thinking of this correctly? I know there is missing information that will help guide responses, but this is all I have from them.

So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?

Warmest Regards,
D
Maybe some Roth conversions.
I did recommend this. They weren't happy there would still be taxes. It is one of those "good problems" to have.
Damned if you do, damned if you don't. On pre-tax money since they have a good amount of SS, unless the heirs have very little income, SOMEONE will have to pay taxes. Who will have a higher marginal tax rate? The heirs or your parents? I think Roth conversions now will make the most sense, since marginal tax rates are set to return to 2017 levels in 2026. Also once that money is converted to Roth, it won't be included in the tIRA balance for calculating RMDs and when the heirs withdraw it will be tax free.
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StartedAt22
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

[/quote]
I think Roth conversions now will make the most sense, since marginal tax rates are set to return to 2017 levels in 2026. Also once that money is converted to Roth, it won't be included in the tIRA balance for calculating RMDs and when the heirs withdraw it will be tax free.
[/quote]

Thanks. This is what I've tried explaining. The Roth puts the tax hit on them right now, but if they are really concerned about their accounts hitting the heirs during their peak earning years, it makes the most sense.

Appreciate your time and insight Anon_Investor.
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anon_investor
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Re: Reducing Taxes in Retirement

Post by anon_investor »

StartedAt22 wrote: Tue Jul 20, 2021 7:52 am
anon_investor wrote: Tue Jul 20, 2021 7:41 am
StartedAt22 wrote: Tue Jul 20, 2021 7:31 am
anon_investor wrote: Tue Jul 20, 2021 7:23 am
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am Greetings,

My parents are 2 years out from RMD age. They have been drawing social security to the tune of ~$50k / yr . In 2 years, they will be required to take RMDs from an account with about $2MM. They are trying to find ways to reduce their taxes owed on this money, and ultimately, the taxes owed by their heirs on this money (with eyes on the SECURE act).

From my understanding, the golden window for them is basically closed as they are already drawing SS (they started taking in their mid-60's). They've asked me for help and I'm stumped. I basically told them that the math gets more detailed now and they would have to estimate the marginal tax rates of their heirs (whenever they think they will pass), and compare to their marginal tax rates at different withdrawal amounts.

Am I thinking of this correctly? I know there is missing information that will help guide responses, but this is all I have from them.

So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?

Warmest Regards,
D
I think Roth conversions now will make the most sense, since marginal tax rates are set to return to 2017 levels in 2026. Also once that money is converted to Roth, it won't be included in the tIRA balance for calculating RMDs and when the heirs withdraw it will be tax free.
Thanks. This is what I've tried explaining. The Roth puts the tax hit on them right now, but if they are really concerned about their accounts hitting the heirs during their peak earning years, it makes the most sense.

Appreciate your time and insight Anon_Investor.
No problem. Additionally, even with RMDs, if they do not need the money, continued Roth conversions (of tIRA funds after RMDs are taken) may still make sense if your parents marginal tax rate will be lower than that of the heirs. This is something that is not discussed enough. Often times when parents pass, their heirs may be in their prime working years with high marginal tax rates. With the new law, the heirs have to empty the tIRA or RIRA within 10 years. The RIRA will have no tax hit to the heirs, the tIRA may have a high tax hit. So for example, if your parents end up converting tIRA funds to Roth at the 22% marginal tax bracket and the heirs would be in the 37% tax bracket, that would be a large savings. Also remember money left in tIRA will likely grow, so if your parents live another 20-30 years by not converting to Roth now, it may end up being an even large tax hit for the heirs.
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Re: Reducing Taxes in Retirement

Post by retiredjg »

So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?
At this point, the only way to reduce taxes on RMDs is to keep the $2 million from growing. That would mean putting the entire $2 million into low return investments like CDs and bonds. And start spending more before RMDs start.

I'm not suggesting this is a good solution, but it will reduce taxes on the RMDs which is what you asked.

Qualified charitable donations (which can be started at 70.5) will also reduce the RMD (and the tax on the RMD) but it seems they are not interested.

The only want to circumvent the SECURE Act that I know of is for the heirs to be disabled. That would mean the inherited IRAs could be stretched out over a lifetime instead of 10 years.

It seems like some modest RMDs might prevent increases in taxes later on. However, there is not enough information to know.
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Re: Reducing Taxes in Retirement

Post by cas »

StartedAt22 wrote: Tue Jul 20, 2021 7:32 am Thanks Tim. I recommended QCD's as well but that doesn't get more after-tax money in their pocket, or their heirs. (these are their words)
Depends.

*If* making charitable contributions was already a part of their lifestyle, then switching from making them out of cash to making them via QCD likely does get more after-tax money in their pocket. (The QCD approach reduces their taxable income regardless of whether they itemize deductions or not. Plus, unlike cash charitable donations, QCDs reduce the income used to determine how much of their SS is taxed and what their Medicare B/D premiums will be 2 years in the future.)

But if charitable contributions aren't already a part of their lifestyle, then they are right that starting QCDs won't put more after-tax money in their pocket.

As far as Roth conversions ... doesn't sound like your parents are much interested in that financially fiddly type of approach, but for the record (and maybe your own interest): Roth conversions can be fraught with peril for people who are already on SS and/or Medicare. This section of the wiki shows how Roth conversions under those circumstances may be hit with unexpectedly high marginal tax rates and gives an example of the thought process that might be involved. (The shape of the graph is only an example. The shape of the graph is highly dependent on individual financial circumstances.): Worth pushing through the Social Security hump and/or IRMAA cliffs?


As far as getting "more after-tax money" in the pocket of their heirs .... this is a much more squishy comment than you are probably looking for, but the biggest bang for the buck out of this whole situation is perhaps *you* becoming more aware of the details of retiree taxes (quite different considerations from taxes during employment years!) and suddenly looking at your own portfolio with new eyes. So, in that educational way, it can be a very generous thing for them to let you get a detailed look at their finances and taxes.
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Re: Reducing Taxes in Retirement

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retiredjg wrote: Tue Jul 20, 2021 8:04 am
So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?
At this point, the only way to reduce taxes on RMDs is to keep the $2 million from growing. That would mean putting the entire $2 million into low return investments like CDs and bonds. And start spending more before RMDs start.

I'm not suggesting this is a good solution, but it will reduce taxes on the RMDs which is what you asked.

Qualified charitable donations (which can be started at 70.5) will also reduce the RMD (and the tax on the RMD) but it seems they are not interested.

The only want to circumvent the SECURE Act that I know of is for the heirs to be disabled. That would mean the inherited IRAs could be stretched out over a lifetime instead of 10 years.

It seems like some modest RMDs might prevent increases in taxes later on. However, there is not enough information to know.
Thanks for the insights retiredjg. I myself am not worried about the taxes as a result of the SECURE act (being one of the presumable heirs). I think the best option for them will just be to accept the tax hit and continue to reinvest the money if it is not needed. They live on their social security since their house (also worth $1MM) is paid off. I told them last night to suck it up, pay the taxes, and spending the money.
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StartedAt22
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

cas wrote: Tue Jul 20, 2021 8:06 am
StartedAt22 wrote: Tue Jul 20, 2021 7:32 am Thanks Tim. I recommended QCD's as well but that doesn't get more after-tax money in their pocket, or their heirs. (these are their words)
Depends.

*If* making charitable contributions was already a part of their lifestyle, then switching from making them out of cash to making them via QCD likely does get more after-tax money in their pocket. (The QCD approach reduces their taxable income regardless of whether they itemize deductions or not. Plus, unlike cash charitable donations, QCDs reduce the income used to determine how much of their SS is taxed and what their Medicare B/D premiums will be 2 years in the future.)

But if charitable contributions aren't already a part of their lifestyle, then they are right that starting QCDs won't put more after-tax money in their pocket.

As far as Roth conversions ... doesn't sound like your parents are much interested in that financially fiddly type of approach, but for the record (and maybe your own interest): Roth conversions can be fraught with peril for people who are already on SS and/or Medicare. This section of the wiki shows how Roth conversions under those circumstances may be hit with unexpectedly high marginal tax rates and gives an example of the thought process that might be involved. (The shape of the graph is only an example. The shape of the graph is highly dependent on individual financial circumstances.): Worth pushing through the Social Security hump and/or IRMAA cliffs?


As far as getting "more after-tax money" in the pocket of their heirs .... this is a much more squishy comment than you are probably looking for, but the biggest bang for the buck out of this whole situation is perhaps *you* becoming more aware of the details of retiree taxes (quite different considerations from taxes during employment years!) and suddenly looking at your own portfolio with new eyes. So, in that educational way, it can be a very generous thing for them to let you get a detailed look at their finances and taxes.
Thanks for your response Cas. Charitable giving isnt already part of their lifestyle so that approach leads to a dead end (for them anyway). In regards to looking at my portfolio differently, could you elaborate? I tend to be very conservative with regard to finances and have made the assumption (which is a poor one) that I will receive $0 from them, including no equity in their home. My hope is that they use this robust financial safety net to extend their life and our time together as much as possible. I've got my own financial house in order, so could care less if they spend down to $0.
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Re: Reducing Taxes in Retirement

Post by jebmke »

StartedAt22 wrote: Tue Jul 20, 2021 8:18 am Thanks for your response Cas. Charitable giving isnt already part of their lifestyle so that approach leads to a dead end (for them anyway). In regards to looking at my portfolio differently, could you elaborate? I tend to be very conservative with regard to finances and have made the assumption (which is a poor one) that I will receive $0 from them, including no equity in their home. My hope is that they use this robust financial safety net to extend their life and our time together as much as possible. I've got my own financial house in order, so could care less if they spend down to $0.
I'm not cas but I'll chime in on what I think was intended in the post. The time to look at tax impacts at major future inflection points (e.g. retirement, starting a pension, starting social security, starting RMDs) is well before those inflection points arrive. As an example, when I was 55 and about to retire I started doing pro-forma tax returns for age 65 when my pension started and age 70 when SS and RMDs started. That way I knew what the shape of my future tax curve might look like. I update these major inflection points every year - even before I do my current year tax return. So, before I even finish my return I have a pro-forma return for "next year," as well as all major future inflection points. A lot of people seem to not pay attention and then one or two years out discover the big tax dilemma with RMDs. By then their options on how to deal with it have narrowed.
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Re: Reducing Taxes in Retirement

Post by bradpevans »

retiredjg wrote: Tue Jul 20, 2021 8:04 am
So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?
At this point, the only way to reduce taxes on RMDs is to keep the $2 million from growing. That would mean putting the entire $2 million into low return investments like CDs and bonds. And start spending more before RMDs start.

I'm not suggesting this is a good solution, but it will reduce taxes on the RMDs which is what you asked.

Qualified charitable donations (which can be started at 70.5) will also reduce the RMD (and the tax on the RMD) but it seems they are not interested.

The only want to circumvent the SECURE Act that I know of is for the heirs to be disabled. That would mean the inherited IRAs could be stretched out over a lifetime instead of 10 years.

It seems like some modest RMDs might prevent increases in taxes later on. However, there is not enough information to know.
Amount of taxes gets the focus but amount of money to spend is really what matters.
Withdrawals ahead of RMD might also take some pressure of the tax hit when RMD is required.

Knowing the tax bracket cut points is part of the calculus to be considered, as well as the % withdrawl required per year
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Re: Reducing Taxes in Retirement

Post by cas »

StartedAt22 wrote: Tue Jul 20, 2021 8:18 am In regards to looking at my portfolio differently, could you elaborate?
It isn't so much that learning about their taxes will put more of *their* money in your heir-ish pocket, but that it might help you keep more of *your* money in your pocket when you hit retirement age.

I say this merely based on personal experience. Your mileage may vary. When I needed to take over doing the taxes and managing portfolios for some elderly relatives, I learned all sorts of new things about how social security income interacts with pensions interacts with RMDs interacts with qualified dividends interacts with maturing savings bonds interacts with Medicare premiums. I could look back and see how some past financial decisions made (or not made) by my relatives were turning out well or poorly tax-wise for them now.

Then I could look at my own portfolio and judge whether I was likely heading right towards problematic retiree tax issues. However, unlike my elderly relatives, I still have some sea lane left to start nudging the portfolio ship onto a different course.

I also got to see how tax law had changed over time, and saw how past decisions that looked odd/bad when viewed through the lens of current tax law made perfect sense when viewed through the lens of the tax law that had been in effect at the time the decision was made. That insight caused me to more diligent in keeping up with tax law changes (and reviewing my portfolio in the light of major changes) and to think more about how to hedge my tax law bets.
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Re: Reducing Taxes in Retirement

Post by secondcor521 »

The main ideas have already been suggested.

A few unlikely-to-work-but-maybe ideas:

1. Change the beneficiaries on their traditional IRAs to beneficiaries who might escape the SECURE Act 10 year window. This might include people under the age of 18, disabled individuals, or beneficiaries who are less than 10 years younger than the original owners. The cure here might be worse than the disease.

2. If either or both of them started SS within the last 12 months, I believe they have a once-per-lifetime option to repay all amounts received and then restart SS at a later age. If they are able to do this, and defer SS to age 70, then they might have several years to do Roth conversions between now and then.

3. Similar to item 1, they might consider leaving their traditional IRAs to recipients who are likely to be in low tax brackets during the SECURE Act 10 year window. Grandkids or great grandkids, for example. They could leave other assets (such as the house and taxable accounts) to their kids (you and your siblings). This option coincidentally probably helps you reduce your estate tax problem if you might have one.

4. They can leave their traditional IRAs to each other, and hope to live long enough for the SECURE Act to change or other options to be created. This idea is probably dicey.
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Re: Reducing Taxes in Retirement

Post by JoeQ »

I would recommend calling a professional to review their situation. Retirement planning is hairy and a CFP will pay for itself.
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Re: Reducing Taxes in Retirement

Post by neurosphere »

With respect to Roth conversions and heirs, I like to frame the discussion this way...

If you pay an extra dollar to taxes today (i.e. via Roth conversion), your heirs will very likely have that extra dollar PLUS an additional amount (X) when taking taxes into account. What value of "X" might entice to you to give up a dollar of your net worth today to increase the net worth of your heirs?
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Re: Reducing Taxes in Retirement

Post by LittleMaggieMae »

Have you reviewed how this will effect their IRMAA and Medicare costs? I don't think it's avoidable - but if they are going to howl about taxes they will pay on their tax differed money when they withdraw it - I'm guessing they will howl about paying more for health care.

As you have said it's a good problem to have.
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Re: Reducing Taxes in Retirement

Post by HootingSloth »

The right answer is probably some amount of Roth conversions as suggested. If they aren't happy because "there would still be taxes," they can solve this "problem" entirely by reducing their net worth below $2M and then renouncing their U.S. citizenship. Otherwise, they will have to pay taxes like the rest of us.
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

JoeQ wrote: Tue Jul 20, 2021 8:58 am I would recommend calling a professional to review their situation. Retirement planning is hairy and a CFP will pay for itself.
They use an advisor at Raymond James. I've tried and tried to get them to switch, but they are insistent that he is worth the money they pay him. I actually used this as an example of what little value "advisors" add. He doesn't know the first thing about retirement / estate planning. He was actually candid about it when they asked him. And they still choose to keep paying for his "advisory" services. Oh well

I'll recommend them to see a retirement planning / estate specialist.

Thank you
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

HootingSloth wrote: Tue Jul 20, 2021 9:11 am The right answer is probably some amount of Roth conversions as suggested. If they aren't happy because "there would still be taxes," they can solve this "problem" entirely by reducing their net worth below $2M and then renouncing their U.S. citizenship. Otherwise, they will have to pay taxes like the rest of us.
Not sure reducing the net worth intentionally and renouncing US citizenship will allow more after tax money into their pocket, or the pocket of their heirs. It would reduce their taxes I guess.

Thank you
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

neurosphere wrote: Tue Jul 20, 2021 9:03 am With respect to Roth conversions and heirs, I like to frame the discussion this way...

If you pay an extra dollar to taxes today (i.e. via Roth conversion), your heirs will very likely have that extra dollar PLUS an additional amount (X) when taking taxes into account. What value of "X" might entice to you to give up a dollar of your net worth today to increase the net worth of your heirs?
I have framed it this way for them. Unfortunately there is little they can do. I think its just something they have to deal with. Again, good problem for them to have.
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Re: Reducing Taxes in Retirement

Post by delamer »

You could try using tax software like the TaxCaster app to demonstrate the effect of Roth conversions and/or starting to take withdrawals from the tax deferred accounts before RMDs.

If they see that taking $50,000 out this year will lower their (net) taxes by $2,000 in their first RMD year, it might hit home. (Numbers are purely speculation.)

Real numbers often are more impactful than theoretical discussions.
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

jebmke wrote: Tue Jul 20, 2021 8:26 am
StartedAt22 wrote: Tue Jul 20, 2021 8:18 am Thanks for your response Cas. Charitable giving isnt already part of their lifestyle so that approach leads to a dead end (for them anyway). In regards to looking at my portfolio differently, could you elaborate? I tend to be very conservative with regard to finances and have made the assumption (which is a poor one) that I will receive $0 from them, including no equity in their home. My hope is that they use this robust financial safety net to extend their life and our time together as much as possible. I've got my own financial house in order, so could care less if they spend down to $0.
I'm not cas but I'll chime in on what I think was intended in the post. The time to look at tax impacts at major future inflection points (e.g. retirement, starting a pension, starting social security, starting RMDs) is well before those inflection points arrive. As an example, when I was 55 and about to retire I started doing pro-forma tax returns for age 65 when my pension started and age 70 when SS and RMDs started. That way I knew what the shape of my future tax curve might look like. I update these major inflection points every year - even before I do my current year tax return. So, before I even finish my return I have a pro-forma return for "next year," as well as all major future inflection points. A lot of people seem to not pay attention and then one or two years out discover the big tax dilemma with RMDs. By then their options on how to deal with it have narrowed.
Ah, ok. That makes sense. I'm fairly literate with regards to personal finance (in the accumulation phase, as I'm pretty focused on FI). I can't say I've ever really given any thought re: starting a pension, starting SS, starting RMD's. Much too far out for me, however it appears this would be a good opportunity to study up. The landscape will likely look much different when I am of the age to retire.

Thanks for your insights.
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

delamer wrote: Tue Jul 20, 2021 9:21 am You could try using tax software like the TaxCaster app to demonstrate the effect of Roth conversions and/or starting to take withdrawals from the tax deferred accounts before RMDs.

If they see that taking $50,000 out this year will lower their (net) taxes by $2,000 in their first RMD year, it might hit home. (Numbers are purely speculation.)

Real numbers often are more impactful than theoretical discussions.
I will peek at TaxCaster. Ultimately, I think meeting with an estate / retirement planner (CFP) is probably the best path forward for them.
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Re: Reducing Taxes in Retirement

Post by Watty »

StartedAt22 wrote: Tue Jul 20, 2021 7:18 am Am I thinking of this correctly?
......
From my understanding, the golden window for them is basically closed as they are already drawing SS (they started taking in their mid-60's).
They may not have missed out on doing Roth conversions because they may not have made sense back then.

The reason is that investments have had spectacular returns over the last 5+ year and you could not have predicted that. I would guess that when they were in their early or mid 60 that their IRA would have been more like a million dollars or less so the RMDs looked like less of an issue then. That was also likely before the tax brackets were reduced so paying for Roth conversion would have also been more expensive.

I really suspect that they may have made very reasonable choices about not doing the Roth conversions back then given the situation at the time so be careful about taking the attitude that they made a mistake.

If RMDs and taxes are an issue now it is likely because their investments unexpectedly doubled(or more), not because of poor planning.
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am I basically told them that the math gets more detailed now and they would have to estimate the marginal tax rates of their heirs (whenever they think they will pass), and compare to their marginal tax rates at different withdrawal amounts.
It is a lot more complicated than that.

It is easy to forget that if they use $100K from a taxable account to pay for a Roth conversion 5+ years ago that $100K would not have had five years to be invested and possibly doubled too. Under the current tax laws that could also go to their heirs at a stepped up cost basis. The heirs might may pay a higher tax rate on the inherited IRA withdrawals but they may have also inherited a good chunk of money tax free in the taxable account. People often forget the extra taxable money and that could be a lot of they live another 25 years and the taxable money grows for another 25 years too.

There is also a silver lining for the heirs if they have to take an unneeded RMD. That is that they would pay taxes on the RMD then just put the unneeded money into a taxable account where it may be invested for several decades. If the heirs then inherit the money at a stepped up cost bases that tax savings will at least in part offset the taxes the parents paid decades before when they took the unneeded RMD.
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am They are trying to find ways to reduce their taxes owed on this money, and ultimately, the taxes owed by their heirs on this money (with eyes on the SECURE act).
I think people worry about RMDs too much without actually running the numbers.

One thing to keep in mind is that they will not have to actually start drawing down their IRA until their RMD percentage is higher than the rate their their investments are growing at. This means that if their investments are growing at 7% then they will not actually have to start drawing down their IRA until the RMD is higher then 7% when they are in their late 80s.

https://www.bogleheads.org/wiki/Require ... stribution
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Re: Reducing Taxes in Retirement

Post by HootingSloth »

StartedAt22 wrote: Tue Jul 20, 2021 9:16 am
HootingSloth wrote: Tue Jul 20, 2021 9:11 am The right answer is probably some amount of Roth conversions as suggested. If they aren't happy because "there would still be taxes," they can solve this "problem" entirely by reducing their net worth below $2M and then renouncing their U.S. citizenship. Otherwise, they will have to pay taxes like the rest of us.
Not sure reducing the net worth intentionally and renouncing US citizenship will allow more after tax money into their pocket, or the pocket of their heirs. It would reduce their taxes I guess.

Thank you
Yes. Rejecting the idea of Roth conversions by saying "there will still be taxes" (as you reported above) is already rejecting the idea of maximizing the amount of after tax money that goes into their pocket or the pocket of their heirs. They should stop trying to just avoid taxes and start optimizing their long-term tax efficiency instead.
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Re: Reducing Taxes in Retirement

Post by delamer »

StartedAt22 wrote: Tue Jul 20, 2021 9:24 am
delamer wrote: Tue Jul 20, 2021 9:21 am You could try using tax software like the TaxCaster app to demonstrate the effect of Roth conversions and/or starting to take withdrawals from the tax deferred accounts before RMDs.

If they see that taking $50,000 out this year will lower their (net) taxes by $2,000 in their first RMD year, it might hit home. (Numbers are purely speculation.)

Real numbers often are more impactful than theoretical discussions.
I will peek at TaxCaster. Ultimately, I think meeting with an estate / retirement planner (CFP) is probably the best path forward for them.
You might run into some resistance with that idea due to the cost of the planner. :wink:

Good luck.
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

HootingSloth wrote: Tue Jul 20, 2021 9:28 am
StartedAt22 wrote: Tue Jul 20, 2021 9:16 am
HootingSloth wrote: Tue Jul 20, 2021 9:11 am The right answer is probably some amount of Roth conversions as suggested. If they aren't happy because "there would still be taxes," they can solve this "problem" entirely by reducing their net worth below $2M and then renouncing their U.S. citizenship. Otherwise, they will have to pay taxes like the rest of us.
Not sure reducing the net worth intentionally and renouncing US citizenship will allow more after tax money into their pocket, or the pocket of their heirs. It would reduce their taxes I guess.

Thank you
Yes. Rejecting the idea of Roth conversions by saying "there will still be taxes" (as you reported above) is already rejecting the idea of maximizing the amount of after tax money that goes into their pocket or the pocket of their heirs. They should stop trying to just avoid taxes and start optimizing their long-term tax efficiency instead.
Agreed. I don't think they are trying to avoid taxes entirely. Merely play the game in the most optimal way possible. Sometimes they have trouble seeing the forest through the trees.

Thanks for the insights.
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Re: Reducing Taxes in Retirement

Post by Jack FFR1846 »

Well, going back in time, it would have been better if they did NOT take SS so early and instead took money from these RMD eligible accounts. This would have had the double whammy of increasing SS payments when they started at 70 AND reducing what's there to determine RMDs.

Since they can't go back in time, I would say to immediately suspend SS payments and start living off the IRA money. I don't know SS, but would research if they can pay back what they've taken out in order to get the annual increases that they threw away.

The keys are to reduce income to stay in a lower tax bracket and use those IRA moneys that will be required distributions in a couple years. Also, remember that the RMDs are individual. So the older spouse will be required to take RMDs while the younger one won't.
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

Watty wrote: Tue Jul 20, 2021 9:26 am
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am Am I thinking of this correctly?
......
From my understanding, the golden window for them is basically closed as they are already drawing SS (they started taking in their mid-60's).
They may not have missed out on doing Roth conversions because they may not have made sense back then.

The reason is that investments have had spectacular returns over the last 5+ year and you could not have predicted that. I would guess that when they were in their early or mid 60 that their IRA would have been more like a million dollars or less so the RMDs looked like less of an issue then. That was also likely before the tax brackets were reduced so paying for Roth conversion would have also been more expensive.

I really suspect that they may have made very reasonable choices about not doing the Roth conversions back then given the situation at the time so be careful about taking the attitude that they made a mistake.

If RMDs and taxes are an issue now it is likely because their investments unexpectedly doubled(or more), not because of poor planning.
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am I basically told them that the math gets more detailed now and they would have to estimate the marginal tax rates of their heirs (whenever they think they will pass), and compare to their marginal tax rates at different withdrawal amounts.
It is a lot more complicated than that.

It is easy to forget that if they use $100K from a taxable account to pay for a Roth conversion 5+ years ago that $100K would not have had five years to be invested and possibly doubled too. Under the current tax laws that could also go to their heirs at a stepped up cost basis. The heirs might may pay a higher tax rate on the inherited IRA withdrawals but they may have also inherited a good chunk of money tax free in the taxable account. People often forget the extra taxable money and that could be a lot of they live another 25 years and the taxable money grows for another 25 years too.

There is also a silver lining for the heirs if they have to take an unneeded RMD. That is that they would pay taxes on the RMD then just put the unneeded money into a taxable account where it may be invested for several decades. If the heirs then inherit the money at a stepped up cost bases that tax savings will at least in part offset the taxes the parents paid decades before when they took the unneeded RMD.
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am They are trying to find ways to reduce their taxes owed on this money, and ultimately, the taxes owed by their heirs on this money (with eyes on the SECURE act).
I think people worry about RMDs too much without actually running the numbers.

One thing to keep in mind is that they will not have to actually start drawing down their IRA until their RMD percentage is higher than the rate their their investments are growing at. This means that if their investments are growing at 7% then they will not actually have to start drawing down their IRA until the RMD is higher then 7% when they are in their late 80s.

https://www.bogleheads.org/wiki/Require ... stribution
Thanks, Watty. That wiki page on RMD's is no joke! I'll run through it later. Maybe I should just link them to bogleheads...

You're also right. This conundrum is not the result of poor planning on their end. It is a result of extraordinary investment returns. Keen observation.
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Re: Reducing Taxes in Retirement

Post by quantAndHold »

I think a lot of people get focused on the big tax bill, and forget how fortunate they are to have such a problem. I mean, there are some small things they can do around the edges to improve the situation (Roth conversions, mainly), but the real “problem” is that they avoided a lot of taxes in the past with 401k and IRA contributions, then had some excellent investment returns, which has set them up with a comfortable retirement and a legacy for the kids.

As far as actual tax planning, they can keep doing Roth conversions even after they start taking RMDs (on top of the RMDs), which they might or might not want to do, because it would increase tax in the year the conversions are taken, but reduce the size of future RMDs. The main advantage of this is that at least some of the future RMDs are likely to be taken after one of them has passed, at the higher single rate (also SECURE act distributions). Some math might be involved to decide whether this is a good idea or not.
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

quantAndHold wrote: Tue Jul 20, 2021 10:18 am I think a lot of people get focused on the big tax bill, and forget how fortunate they are to have such a problem. I mean, there are some small things they can do around the edges to improve the situation (Roth conversions, mainly), but the real “problem” is that they avoided a lot of taxes in the past with 401k and IRA contributions, then had some excellent investment returns, which has set them up with a comfortable retirement and a legacy for the kids.

As far as actual tax planning, they can keep doing Roth conversions even after they start taking RMDs (on top of the RMDs), which they might or might not want to do, because it would increase tax in the year the conversions are taken, but reduce the size of future RMDs. The main advantage of this is that at least some of the future RMDs are likely to be taken after one of them has passed, at the higher single rate (also SECURE act distributions). Some math might be involved to decide whether this is a good idea or not.
I think my parents are aware of their good fortune. They both come from humble, working class families. That said, they are playing the game the way I would expect any rational person would.

Thanks for your insights. They will need to crunch the numbers, or pay someone to do so.
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Re: Reducing Taxes in Retirement

Post by cowdogman »

Two suggestions:

1. Do a pro forma tax return for your parents for each of, say, the next five years to see what the impact of the RMDs will be--a full tax return for each year taking into the standard deduction (current and the one in effect in 2026), over 65 deduction, exemptions (when those come back into play in 2026). At least you'll know the $ magnitude of the issue (and I suspect it will be less than you fear).

2. Explain to you parents (if necessary) the difference between voluntary and involuntary income in retirement. Involuntary income is SS, RMDs and dividends from taxable investments. Voluntary income includes selling taxable investments when there is a gain and withdrawing retirements funds above the RMD. They need to take taxes into account when generating voluntary income. They could also try to modify their taxable investments to reduce income, but this is a balancing act with wanting those investments to grow (that is, don't pick an investment just because of the low dividends).

There is little they can do at this point and what they can do will have little impact. Roth conversions are an option at this point, but I wouldn't do anything above the 12% bracket without a lot of modelling. I also agree that hiring an hourly-fee or fixed-fee financial planner would probably pay for itself.
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

cowdogman wrote: Tue Jul 20, 2021 10:47 am Two suggestions:

1. Do a pro forma tax return for your parents for each of, say, the next five years to see what the impact of the RMDs will be--a full tax return for each year taking into the standard deduction (current and the one in effect in 2026), over 65 deduction, exemptions (when those come back into play in 2026). At least you'll know the $ magnitude of the issue (and I suspect it will be less than you fear).

2. Explain to you parents (if necessary) the difference between voluntary and involuntary income in retirement. Involuntary income is SS, RMDs and dividends from taxable investments. Voluntary income includes selling taxable investments when there is a gain and withdrawing retirements funds above the RMD. They need to take taxes into account when generating voluntary income. They could also try to modify their taxable investments to reduce income, but this is a balancing act with wanting those investments to grow (that is, don't pick an investment just because of the low dividends).

There is little they can do at this point and what they can do will have little impact. Roth conversions are an option at this point, but I wouldn't do anything above the 12% bracket without a lot of modelling. I also agree that hiring an hourly-fee or fixed-fee financial planner would probably pay for itself.
Thanks,cowdogman. I will recommend the pro forma tax return to them just to understand their total exposure re: taxes. As for #2, they basically only have fixed income in their taxable investments (CD ladders, money market accounts) to the tune of approx. $200k or so.
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Re: Reducing Taxes in Retirement

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I removed an off-topic post and reply. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters.
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Re: Reducing Taxes in Retirement

Post by FiveK »

StartedAt22 wrote: Tue Jul 20, 2021 10:44 am They will need to crunch the numbers, or pay someone to do so.
If they (or you with their input) are at all comfortable with Excel, the tool that generated the chart cas mentioned will allow them to see their own Roth conversion "tax landscape" for 2021.
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Re: Reducing Taxes in Retirement

Post by Lee_WSP »

They're only going to be in the 22/24 bracket. The survivor will be in the 24. It's going to hurt the heirs more due to secure. It's too late to play the tax arbitrage game.

They need to just live life, enjoy it, pay the taxes they've deferred.
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Re: Reducing Taxes in Retirement

Post by tibbitts »

JoeQ wrote: Tue Jul 20, 2021 8:58 am I would recommend calling a professional to review their situation. Retirement planning is hairy and a CFP will pay for itself.
It will only pay for itself if they get lucky. For example, if the CFP had recommended large Roth conversions back when it might not have obviously made sense due to their then-much-lower balance, that would probably have turned out to be a big win. If on the other hand markets were lower or at the same level now than when they made conversions years ago, they'd be cursing that CFP (and the OP for recommending him/her) for the rest of their lives. Converting (or not) either works out or doesn't based on countless assumptions, with or a without a CFP involved.

Incidentally I'm not convinced $2M is a problem for MFJ. It more likely is for a typical single person.
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Re: Reducing Taxes in Retirement

Post by tomsense76 »

anon_investor wrote: Tue Jul 20, 2021 7:41 am
StartedAt22 wrote: Tue Jul 20, 2021 7:31 am
anon_investor wrote: Tue Jul 20, 2021 7:23 am
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am Greetings,

My parents are 2 years out from RMD age. They have been drawing social security to the tune of ~$50k / yr . In 2 years, they will be required to take RMDs from an account with about $2MM. They are trying to find ways to reduce their taxes owed on this money, and ultimately, the taxes owed by their heirs on this money (with eyes on the SECURE act).

From my understanding, the golden window for them is basically closed as they are already drawing SS (they started taking in their mid-60's). They've asked me for help and I'm stumped. I basically told them that the math gets more detailed now and they would have to estimate the marginal tax rates of their heirs (whenever they think they will pass), and compare to their marginal tax rates at different withdrawal amounts.

Am I thinking of this correctly? I know there is missing information that will help guide responses, but this is all I have from them.

So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?

Warmest Regards,
D
Maybe some Roth conversions.
I did recommend this. They weren't happy there would still be taxes. It is one of those "good problems" to have.
Damned if you do, damned if you don't. On pre-tax money since they have a good amount of SS, unless the heirs have very little income, SOMEONE will have to pay taxes. Who will have a higher marginal tax rate? The heirs or your parents? I think Roth conversions now will make the most sense, since marginal tax rates are set to return to 2017 levels in 2026. Also once that money is converted to Roth, it won't be included in the tIRA balance for calculating RMDs and when the heirs withdraw it will be tax free.
Yeah there are always taxes. We can defer and minimize, but eliminate entirely is hard.

We went through this with my grandmother, who also hated paying taxes. My Dad use to joke that you can either make money or not pay taxes, but never both :wink:

It's worth noting that pre-tax money gets a bad rap when maybe it shouldn't. It can be used to cover medical expenses, which get increasingly large as we get older. Those can often be itemized on ones taxes. As a result one may wind up paying no or little tax on pre-tax money used for things like medical expenses.
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

Lee_WSP wrote: Tue Jul 20, 2021 3:13 pm They're only going to be in the 22/24 bracket. The survivor will be in the 24. It's going to hurt the heirs more due to secure. It's too late to play the tax arbitrage game.

They need to just live life, enjoy it, pay the taxes they've deferred.
I am trying to convince them of this. Basically that they have "won" and they never have to worry about their own finances, or those of their heirs. Unfortunately, frugality, like any old habit, dies hard.
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Re: Reducing Taxes in Retirement

Post by StartedAt22 »

tomsense76 wrote: Tue Jul 20, 2021 5:11 pm
anon_investor wrote: Tue Jul 20, 2021 7:41 am
StartedAt22 wrote: Tue Jul 20, 2021 7:31 am
anon_investor wrote: Tue Jul 20, 2021 7:23 am
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am Greetings,

My parents are 2 years out from RMD age. They have been drawing social security to the tune of ~$50k / yr . In 2 years, they will be required to take RMDs from an account with about $2MM. They are trying to find ways to reduce their taxes owed on this money, and ultimately, the taxes owed by their heirs on this money (with eyes on the SECURE act).

From my understanding, the golden window for them is basically closed as they are already drawing SS (they started taking in their mid-60's). They've asked me for help and I'm stumped. I basically told them that the math gets more detailed now and they would have to estimate the marginal tax rates of their heirs (whenever they think they will pass), and compare to their marginal tax rates at different withdrawal amounts.

Am I thinking of this correctly? I know there is missing information that will help guide responses, but this is all I have from them.

So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?

Warmest Regards,
D
Maybe some Roth conversions.
I did recommend this. They weren't happy there would still be taxes. It is one of those "good problems" to have.
Damned if you do, damned if you don't. On pre-tax money since they have a good amount of SS, unless the heirs have very little income, SOMEONE will have to pay taxes. Who will have a higher marginal tax rate? The heirs or your parents? I think Roth conversions now will make the most sense, since marginal tax rates are set to return to 2017 levels in 2026. Also once that money is converted to Roth, it won't be included in the tIRA balance for calculating RMDs and when the heirs withdraw it will be tax free.
Yeah there are always taxes. We can defer and minimize, but eliminate entirely is hard.

We went through this with my grandmother, who also hated paying taxes. My Dad use to joke that you can either make money or not pay taxes, but never both :wink:

It's worth noting that pre-tax money gets a bad rap when maybe it shouldn't. It can be used to cover medical expenses, which get increasingly large as we get older. Those can often be itemized on ones taxes. As a result one may wind up paying no or little tax on pre-tax money used for things like medical expenses.
I spoke with them over lunch and did mention this. Medical expenses are a good one. They are both in good health now, but we all understand at their age it can change on whim. Thanks
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Re: Reducing Taxes in Retirement

Post by Lee_WSP »

StartedAt22 wrote: Tue Jul 20, 2021 5:21 pm
Lee_WSP wrote: Tue Jul 20, 2021 3:13 pm They're only going to be in the 22/24 bracket. The survivor will be in the 24. It's going to hurt the heirs more due to secure. It's too late to play the tax arbitrage game.

They need to just live life, enjoy it, pay the taxes they've deferred.
I am trying to convince them of this. Basically that they have "won" and they never have to worry about their own finances, or those of their heirs. Unfortunately, frugality, like any old habit, dies hard.
Oh I'm with them on being frugal. Unfortunately, the reality is that they risk paying more taxes than necessary.

They have a few years left. Tell them to fill the 24% bracket mindful of Irma until RMD s. It'll give them something to do.

This is just a mental trick as opposed to making any real difference.
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Re: Reducing Taxes in Retirement

Post by delamer »

StartedAt22 wrote: Tue Jul 20, 2021 5:21 pm
Lee_WSP wrote: Tue Jul 20, 2021 3:13 pm They're only going to be in the 22/24 bracket. The survivor will be in the 24. It's going to hurt the heirs more due to secure. It's too late to play the tax arbitrage game.

They need to just live life, enjoy it, pay the taxes they've deferred.
I am trying to convince them of this. Basically that they have "won" and they never have to worry about their own finances, or those of their heirs. Unfortunately, frugality, like any old habit, dies hard.
There are some people — and I don’t mean to imply that your parents are in this group — that would rather receive $50 that they don’t have to pay any taxes on than receive $100 that they have to pay $25 in taxes on. It’s completely irrational, but far from unknown.
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Re: Reducing Taxes in Retirement

Post by LilyFleur »

jebmke wrote: Tue Jul 20, 2021 8:26 am
StartedAt22 wrote: Tue Jul 20, 2021 8:18 am Thanks for your response Cas. Charitable giving isnt already part of their lifestyle so that approach leads to a dead end (for them anyway). In regards to looking at my portfolio differently, could you elaborate? I tend to be very conservative with regard to finances and have made the assumption (which is a poor one) that I will receive $0 from them, including no equity in their home. My hope is that they use this robust financial safety net to extend their life and our time together as much as possible. I've got my own financial house in order, so could care less if they spend down to $0.
I'm not cas but I'll chime in on what I think was intended in the post. The time to look at tax impacts at major future inflection points (e.g. retirement, starting a pension, starting social security, starting RMDs) is well before those inflection points arrive. As an example, when I was 55 and about to retire I started doing pro-forma tax returns for age 65 when my pension started and age 70 when SS and RMDs started. That way I knew what the shape of my future tax curve might look like. I update these major inflection points every year - even before I do my current year tax return. So, before I even finish my return I have a pro-forma return for "next year," as well as all major future inflection points. A lot of people seem to not pay attention and then one or two years out discover the big tax dilemma with RMDs. By then their options on how to deal with it have narrowed.
What do you use for your estimated rate of return on your portfolio when you are planning tax returns for the future?
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LilyFleur
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Re: Reducing Taxes in Retirement

Post by LilyFleur »

tibbitts wrote: Tue Jul 20, 2021 5:00 pm
JoeQ wrote: Tue Jul 20, 2021 8:58 am I would recommend calling a professional to review their situation. Retirement planning is hairy and a CFP will pay for itself.
It will only pay for itself if they get lucky. For example, if the CFP had recommended large Roth conversions back when it might not have obviously made sense due to their then-much-lower balance, that would probably have turned out to be a big win. If on the other hand markets were lower or at the same level now than when they made conversions years ago, they'd be cursing that CFP (and the OP for recommending him/her) for the rest of their lives. Converting (or not) either works out or doesn't based on countless assumptions, with or a without a CFP involved.

Incidentally I'm not convinced $2M is a problem for MFJ. It more likely is for a typical single person.
You could have them take a look at a "what if" if one of them were single, and what their tax bill would be like in those single brackets with RMDs (it can be brutal). That might motivate them to do some Roth conversions now. If they are so adamantly set against paying taxes to the point that it immobilizes them, though, you may be wasting your time. And it does seem like they have come to this realization a bit late in the game. I'm paying extra taxes out of my brokerage account currently to do Roth conversions, and I'm 61 and in the scary single tax brackets. I don't consider myself an early bird, and I'm quite grateful to this forum for educating me.
babystep
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Re: Reducing Taxes in Retirement

Post by babystep »

StartedAt22 wrote: Tue Jul 20, 2021 7:31 am
anon_investor wrote: Tue Jul 20, 2021 7:23 am
StartedAt22 wrote: Tue Jul 20, 2021 7:18 am Greetings,

My parents are 2 years out from RMD age. They have been drawing social security to the tune of ~$50k / yr . In 2 years, they will be required to take RMDs from an account with about $2MM. They are trying to find ways to reduce their taxes owed on this money, and ultimately, the taxes owed by their heirs on this money (with eyes on the SECURE act).

From my understanding, the golden window for them is basically closed as they are already drawing SS (they started taking in their mid-60's). They've asked me for help and I'm stumped. I basically told them that the math gets more detailed now and they would have to estimate the marginal tax rates of their heirs (whenever they think they will pass), and compare to their marginal tax rates at different withdrawal amounts.

Am I thinking of this correctly? I know there is missing information that will help guide responses, but this is all I have from them.

So to summarize, how can a retiree reduce their taxes on RMD's when also drawing social security? Are there any tips on how to circumvent the policies set forth in the SECURE act?

Warmest Regards,
D
Maybe some Roth conversions.
I did recommend this. They weren't happy there would still be taxes. It is one of those "good problems" to have.
Showing the numbers, education and fairness can be key in such cases when we may not understand and feel that we must avoid paying the taxes on RMDs.

With respect to showing the numbers, please take a look at this. I assumed 50k social security and 80k RMDs = 130k income. The total tax due is about 14k and you get to keep rest of the 105k.

https://engaging-data.com/tax-brackets/ ... 30000&cg=0

With respect to education and fairness, one needs to remember that the 2M in TDA (tax deferred account) is not all yours. It is tax deferred. You didn't pay the tax on it to begin with and you owe the tax. I am not suggesting that one must pay tax more than what is fair or required by law but once we understand the fairness aspect then we maybe less unhappy :)
delamer
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Re: Reducing Taxes in Retirement

Post by delamer »

As others have noted, there has been a big runup in a lot of portfolios over recent years. And certainly most people over the course of a 30 or 40 year investing cycle will have large gains in their investments.

I have a spreadsheet showing our contributions to tax-deferred accounts over the years. We have not started withdrawals yet.

About 20% of our total tax-deferred portfolio is from money withheld from our paychecks. Another 13% of the total is from employer matches. The other 2/3s is from investment gains on the withholdings and matches over roughly 35 years.

EDIT: One-half of our contributions plus matches was deposited in the 10 calendar years before I retired. In addition to a 35% marginal tax rate (combined federal & state) at a minimum, we were getting hit with the AMT during that period.

Just a different perspective to consider…
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
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