200,000 cash, retired, what's the best way to avoid taxes

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dmizesr
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200,000 cash, retired, what's the best way to avoid taxes

Post by dmizesr »

OK, first, thanks to the folks that help out with this.

I'm 63, retired, married, we sold our house and after everything else I have $200,000 left. It's currently sitting in a high yield savings account giving me about $1100 per month in interest. And, as I found out, that's taxable income. Of course, that could also skew my Social Security if we file jointly, but even if we don't the income has to show up somewhere and the IRS really enjoys taking a big bite out of it.

I have about $220,000 in 401ks which I'm not currently taking any distributions on.

So, what can I do with this $200k that will afford me the smallest tax burden? Preferably, of course, with a return similar to our current savings account.

Again, thanks in advance.
123
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by 123 »

You're likely looking for tax efficiency. Basically put fixed income holdings in tax-deferred accounts and put stocks/equity holdings in Roth and taxable accounts. If you have stocks in a tax-deferred account, like a traditional IRA or 401K, your gains get taxed as regular income when you take distributions, you lose the advantage of capital gains taxation.

The dividend yield on something like an total stock market index fund is about 1.6% versus money market/HYSA income of 5% these days. Holding stocks in taxable accounts reduces your taxable income from dividends. Since Roth and taxable accounts don't have forced distributions, like RMDs, you can usually harvest stock market capital gains over the long term at your leisure. This assumes long term stock growth, but it can get bumpy.
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Silk McCue
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by Silk McCue »

$13,200 in interest is nice but unlikely to have significant impact on your taxes unless you have a large amount of other taxable income.

Have you modeled your income and associated taxes now that you are retired. If not I suggest you do so.

Welcome to the forum.

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livesoft
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by livesoft »

There are tax-exempt muni bond funds for folks in high tax brackets.

Otherwise, there are riskier broad market, passively-managed, stock index funds that might go up or might go down in value. They would pay quarterly dividends amounting to a few percent that would be taxed at the qualified dividend tax rate. VLCAX has paid a 100% qualified dividend in 2023.

As @123 stated: Put your taxable account $200,000 in a tax-efficient stock fund and if you like exchange in your 401(k) $200,000 from a stock fund to a bond fund or money market fund.
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p1db
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by p1db »

dmizesr wrote: Tue Apr 02, 2024 7:30 pm OK, first, thanks to the folks that help out with this.

I'm 63, retired, married, we sold our house and after everything else I have $200,000 left. It's currently sitting in a high yield savings account giving me about $1100 per month in interest. And, as I found out, that's taxable income. Of course, that could also skew my Social Security if we file jointly, but even if we don't the income has to show up somewhere and the IRS really enjoys taking a big bite out of it.

I have about $220,000 in 401ks which I'm not currently taking any distributions on.

So, what can I do with this $200k that will afford me the smallest tax burden? Preferably, of course, with a return similar to our current savings account.

Again, thanks in advance.
$1100 per month interest in a savings account with $200,000 translates to 6.60% APY.
Which financial institution is offering this high rate?
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arcticpineapplecorp.
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by arcticpineapplecorp. »

dmizesr wrote: Tue Apr 02, 2024 7:30 pm OK, first, thanks to the folks that help out with this.

I'm 63, retired, married, we sold our house and after everything else I have $200,000 left. It's currently sitting in a high yield savings account giving me about $1100 per month in interest. And, as I found out, that's taxable income. Of course, that could also skew my Social Security if we file jointly, but even if we don't the income has to show up somewhere and the IRS really enjoys taking a big bite out of it.
welcome to the group.

getting $1100 a month is $13,200 a year.

$13,200 / $200,000 = 6.6%

where are you getting 6.6% on your high yield savings?

asking for a friend.

could only find digital federal credit union paying 6.17% apy but only on balances up to $1000.
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delamer
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by delamer »

It’s not clear whether you need the income from the $200,000 to cover your expenses.

If not, then you could invest it in a non-dividend paying stock(s) to avoid taxes (until you sell shares and realize capital gains).

But there is no free lunch. If you want to get income from the money, then you have to pay taxes on the income. A stock mutual fund that pays (mostly) qualified dividends is an option that may have a lower tax rate for you than the savings account. (I see someone mentioned VLCAX earlier.) But it depends on your overall taxable income.

You can use tax software or an app like TaxCaster to estimate the effect of the current investment on your taxes.
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Johm221122
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by Johm221122 »

Another option is MYGA'S. Here is a long thread about them
viewtopic.php?t=334589
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1hotjava
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by 1hotjava »

If you live in a state with an income tax, you could save some on taxes by investing that in treasuries since they are state tax free.

Honestly, you WANT to make money on this money. Dont try to avoid making money just for the sake of "saving on taxes". People fall into that fallacy all the time. Generally if you pay taxes, you made money!
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yogesh
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by yogesh »

Municipal bond funds are tax free income
Emergency: FDIC | Taxable: VTMFX | Retirement: TR2040
the_wiki
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by the_wiki »

dmizesr wrote: Tue Apr 02, 2024 7:30 pm OK, first, thanks to the folks that help out with this.

I'm 63, retired, married, we sold our house and after everything else I have $200,000 left. It's currently sitting in a high yield savings account giving me about $1100 per month in interest. And, as I found out, that's taxable income. Of course, that could also skew my Social Security if we file jointly, but even if we don't the income has to show up somewhere and the IRS really enjoys taking a big bite out of it.

I have about $220,000 in 401ks which I'm not currently taking any distributions on.

So, what can I do with this $200k that will afford me the smallest tax burden? Preferably, of course, with a return similar to our current savings account.

Again, thanks in advance.
Interest income does not affect social security. Only earnings from work.

Would you rather make $0 and $0 taxes? or earn $10k and pay $3k in taxes? I would take the latter myself.
Doctor Rhythm
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by Doctor Rhythm »

Welcome to the forum.

Two thoughts:

1. You need to consider (and let us know) how far you want to deviate from cash in terms of liquidity and risk of principal loss. Stocks have higher expected returns which are also taxed at lower rates — but with much higher risk.

2. You probably want to increase after tax return rather than decrease taxes.

With regards to #1, you can probably earn at least 0.5-1% more using a money market fund instead of high-yield savings, and you might avoid paying state income tax if you select a treasury MMF. This is also quite cash-like in terms of liquidity and safety. You will pay more tax overall on a good money market fund than you’re paying now, and that’s a good thing (see #2).
Last edited by Doctor Rhythm on Wed Apr 03, 2024 12:35 am, edited 1 time in total.
exodusNH
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by exodusNH »

the_wiki wrote: Tue Apr 02, 2024 9:50 pm Interest income does not affect social security. Only earnings from work.

Would you rather make $0 and $0 taxes? or earn $10k and pay $3k in taxes? I would take the latter myself.
Pretty sure that interest income counts, including non-taxable interest.
the_wiki
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by the_wiki »

exodusNH wrote: Wed Apr 03, 2024 12:34 am
the_wiki wrote: Tue Apr 02, 2024 9:50 pm Interest income does not affect social security. Only earnings from work.

Would you rather make $0 and $0 taxes? or earn $10k and pay $3k in taxes? I would take the latter myself.
Pretty sure that interest income counts, including non-taxable interest.
SSA says no.

https://faq.ssa.gov/en-us/Topic/article ... 20benefits.

https://www.ssa.gov/benefits/retirement ... tion%20pay.
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by exodusNH »

the_wiki wrote: Wed Apr 03, 2024 12:54 am
exodusNH wrote: Wed Apr 03, 2024 12:34 am
the_wiki wrote: Tue Apr 02, 2024 9:50 pm Interest income does not affect social security. Only earnings from work.

Would you rather make $0 and $0 taxes? or earn $10k and pay $3k in taxes? I would take the latter myself.
Pretty sure that interest income counts, including non-taxable interest.
SSA says no.

https://faq.ssa.gov/en-us/Topic/article ... 20benefits.

https://www.ssa.gov/benefits/retirement ... tion%20pay.
It seems clear from this page that it is taxed, though:

https://faq.ssa.gov/en-us/Topic/article/KA-02471
NOTE: “Combined income” includes your adjusted gross income, tax-exempt interest income and half of your Social Security benefits.
Since interest is part of AGI, it would seem to be included in the calculation.
madbrain
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by madbrain »

exodusNH wrote: Wed Apr 03, 2024 1:54 am Since interest is part of AGI, it would seem to be included in the calculation.
Yes. One link says this type of income doesn't "reduce" the Social Security benefits amount.
The other link says this type of income can cause parts of Social Security benefits to become taxable.
Two different but ultimately very similar things.
Atomsplitter
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by Atomsplitter »

dmizesr wrote: Tue Apr 02, 2024 7:30 pm Of course, that could also skew my Social Security if we file jointly, but even if we don't the income has to show up somewhere and the IRS really enjoys taking a big bite out of it.

I have about $220,000 in 401ks which I'm not currently taking any distributions on.

So, what can I do with this $200k that will afford me the smallest tax burden? Preferably, of course, with a return similar to our current savings account.

Again, thanks in advance.
Not having a full background on spending needs or plans I will say the following with the caveat that your needs may differ.

What you might see as a problem others see as an opportunity! I see you haven't yet filed, so you now have a bridge fund to extend the date you file and accomplish some things that might help in the long run. You can convert some or all of your 401k to 401 Roth (assuming your plan allows this) over a tax advantaged time frame then the income won't be as much of a "Tax Burden". You can also pay forward any future expense you think you will eventually use this money for like insurance premiums, debit (guessing that already done but never know), or other annualized/expected bills. So many variables here that are unknown but there are many ways to put to use "windfall" money in the short term that will benefit you in the long run, and like someone already said paying more taxes because you have more income in not a "bad" thing, paying more taxes because you don't take steps that can be taken to improve your situation is paying BAD taxes! :oops:
Bikesy
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by Bikesy »

How much income are you generating per year? Do you actually have any tax burden? If your MFJ and taking the standard deduction there's quite a bit of room in the "0%" bracket.
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Stinky
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by Stinky »

dmizesr wrote: Tue Apr 02, 2024 7:30 pm So, what can I do with this $200k that will afford me the smallest tax burden? Preferably, of course, with a return similar to our current savings account.
Welcome to the Forum!

One option to defer, but not avoid, income taxes would be to purchase a multi-year guaranteed annuity (MYGA), which is somewhat similar to a CD in that it credits a fixed rate of interest for a fixed period of time.

While the MYGA is in place, interest can continue to accumulate within the product tax deferred. Taxable income is reported to you only when you make withdrawals.

There are some considerations to MYGAs you should be aware of -
--- Most products have heavy surrender charges and market value adjustments if you need to withdraw funds (in excess of any "free withdrawals) before the guarantee period is over
--- MYGAs are not FDIC insured. Rather, policyholder protection against insurer insolvency is provided by state life and health guaranty associations
--- MYGAs defer, but do not avoid, reporting of taxable income. And they do not receive a basis step up at death. So if you never withdraw the funds and report taxable income, your heirs will be reporting that income.

My favorite site for researching MYGAs and seeing a wide range of products available in your state is Blueprint Income. Here's the landing page for the "fixed income" part of the Blueprint site.
https://www.blueprintincome.com/resourc ... -annuities

Many MYGAs from well rated companies are currently paying over 5% for a five year term.

Post back if you want to learn more about using a MYGA to achieve your goals of deferring taxable income while receiving an attractive rate of interest.
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Exchme
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by Exchme »

dmizesr wrote: Tue Apr 02, 2024 7:30 pm OK, first, thanks to the folks that help out with this.

I'm 63, retired, married, we sold our house and after everything else I have $200,000 left. It's currently sitting in a high yield savings account giving me about $1100 per month in interest. And, as I found out, that's taxable income. Of course, that could also skew my Social Security if we file jointly, but even if we don't the income has to show up somewhere and the IRS really enjoys taking a big bite out of it.

I have about $220,000 in 401ks which I'm not currently taking any distributions on.

So, what can I do with this $200k that will afford me the smallest tax burden? Preferably, of course, with a return similar to our current savings account.

Again, thanks in advance.
Everyone is shooting in the dark here, so it would help to have some more information about your SS benefits, spouse's SS benefits, any other income, annual spending, spouse's age, desired asset allocation (or your desire for growth vs. tolerance for risk of loss)

If your SS and any pension are enough to live on, maybe your taxable account should be in a broad stock market fund like Vanguard's Total Stock market. Its dividends are about 2% and almost entirely are qualified dividends so may not be taxed at all depending on your income.

You may consider small Roth conversions from your 401k, but be careful, once you hit the start of the SS benefit tax phase-in, taxes on extra conversions are much higher.
trueblueky
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by trueblueky »

A sign at the college clinic read, "Abstinence is 100% effective as birth control. See us about slightly less effective methods."

Similarly, money under the mattress produces no taxable income, state or federal.
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by z3r0c00l »

How strange to lament taxes on higher interest rates. Would you rather make no interest and then pay no taxes? This is like getting a raise and then being annoyed that the withholding goes up. I doubt there is much you can do to change this situation, perhaps investing in more stocks, but that comes with vastly higher volatility.
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AB609
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by AB609 »

You need to post more details on your income and expenses if you want a good analysis. Ultimately, you have to look at what is going to produce the best free cash while considering your risk tolerance. Don't let the tax tail wag the dog.
delamer
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by delamer »

z3r0c00l wrote: Wed Apr 03, 2024 7:16 am How strange to lament taxes on higher interest rates. Would you rather make no interest and then pay no taxes? This is like getting a raise and then being annoyed that the withholding goes up. I doubt there is much you can do to change this situation, perhaps investing in more stocks, but that comes with vastly higher volatility.
The issue is that if the interest income pushes up the OP’s total income enough, it could make more of her/his Social Security benefit taxable. But without knowing more details about the OP’s income (and expenses), we can’t help determine if that is a potential problem.

In theory, there may be a scenario where a higher pre-tax income leads to a lower post-tax income.
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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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by Johm221122 »

the_wiki wrote: Wed Apr 03, 2024 12:54 am
exodusNH wrote: Wed Apr 03, 2024 12:34 am
the_wiki wrote: Tue Apr 02, 2024 9:50 pm Interest income does not affect social security. Only earnings from work.

Would you rather make $0 and $0 taxes? or earn $10k and pay $3k in taxes? I would take the latter myself.
Pretty sure that interest income counts, including non-taxable interest.
SSA says no.

https://faq.ssa.gov/en-us/Topic/article ... 20benefits.

https://www.ssa.gov/benefits/retirement ... tion%20pay.
Are those links talking about working and the penalty involved (which of course interest doesn't count because it's not earned income)? That may be exactly what the OP is talking about but was a little unclear and probably not most people's first thought
the_wiki
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by the_wiki »

madbrain wrote: Wed Apr 03, 2024 2:59 am
exodusNH wrote: Wed Apr 03, 2024 1:54 am Since interest is part of AGI, it would seem to be included in the calculation.
Yes. One link says this type of income doesn't "reduce" the Social Security benefits amount.
The other link says this type of income can cause parts of Social Security benefits to become taxable.
Two different but ultimately very similar things.
There is really no scenario where you come out behind by earning more money. The interest income gets offset by the standard deduction. So by the time you own any additional tax, you've earned more than the standard deduction. The additional tax is more than compensated for by the large gain in income.

For example, if you were just under the taxable SSA threshold of $25k and made $14k in interest income, it would only cause $250 of your SSA income to be taxable and that would be at 10 or 12% bracket, so $25-30 extra tax.

So you have $250 + $14000 in taxable income for the year. Most of it at 10%, so you are paying under $1500 in taxes for an additional $14k in income.

Source: https://www.irs.gov/help/ita/are-my-soc ... ts-taxable
madbrain
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Re: 200,000 cash, retired, what's the best way to avoid taxes

Post by madbrain »

the_wiki wrote: Wed Apr 03, 2024 10:38 am For example, if you were just under the taxable SSA threshold of $25k and made $14k in interest income, it would only cause $250 of your SSA income to be taxable and that would be at 10 or 12% bracket, so $25-30 extra tax.

So you have $250 + $14000 in taxable income for the year. Most of it at 10%, so you are paying under $1500 in taxes for an additional $14k in income.

Source: https://www.irs.gov/help/ita/are-my-soc ... ts-taxable
Thanks. There are still some cliffs in the tax code., so that earning more money can net you much less. The ACA cliff is scheduled to return if the TCJA is allowed to expire. That is a very expensive cliff .
As I understand, TIRA withdrawals count as income for the purpose of determining the portion of SS that's taxable.
If you start SEPP from a TIRA/401K at 58 due to running out of funds in taxable, and take SS at 62, you could be in a world of hurt by exceeding the 400% FPL for ACA subsidy for at least one year. The premium at that age could actually exceed the SS benefit amount. That would make it a >100% tax rate. In this case one could delay SS obviously. Perhaps breaking the SEPP would cost less in penalties.
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