Author Topic: Avoiding Taxes in Retirement (US)  (Read 1192 times)

Txtriathlete

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Avoiding Taxes in Retirement (US)
« on: March 15, 2017, 01:19:58 PM »
Posted this in Investments and was advised to post it as a case study, so here ya go.

My specific question is "How can I avoid paying taxes on tax deferred retirement accounts when I turn 70?"

I anticipate a pretty large tax bill if I wait to let my tax deferred accounts roll over to mandatory deductions (RMDs). I don't anticipate any scenario that would require me to withdraw these funds anytime before then (during the age 59-70 time frame) and really none that requires withdrawal after 70 except for RMD.

I don't foresee a time in the future when my marginal tax rate will be lower than it is today.

I have just under $400,000 in tax deferred retirement accounts - $401K, IRA, TSP and SEP. Another $100,000 in Roths. Still contributing max to 401K ($17K/year) and plan to put $6500 a year into IRA for backdoor Roth conversion.

Still working; annual income is ballpark $250000 so no more regular Roth contributions. Going to stay employed at this income level for the foreseeable future. I don't want to go into detail but trust me this is a sweet employment deal and not "work" like most people envision it.

Employer doesn't allow after tax contributions to 401K, so no Mega-Backdoor Roth.

Wife has the IRA and the SEP, so no backdoor Roth for her unless I want the conversion taxed (ballpark $80000 in those two accounts) based on the total account makeup.

I can (and will) do backdoor Roth for myself this year, but that only covers $6,500 (I'm 52).

I would like to place another $70000 or so per year into "savings" and to convert the tax deferred accounts into something that doesn't require RMDs or incur taxes on gains (so it can grow tax free).

I have a "whole life" insurance policy for each of us that allows after tax contributions but isn't taxed for gains until withdrawal (standard rates apply) or death payment (special tax rules). About $275000 in these accounts. Returns are poor - 4-6%. :(

I also have a tax exempt muni bond fund with about $13000. Also poor returns - 4%ish.

I don't like either of these assets as a long term strategy for large amounts, although the bond fund is part of the investment portfolio plan at a small overall percentage.


Thinking of strategies along the lines of starting a non-profit or something similar. Some income would go to charity (not a bad thing) and some to myself and spouse as officers, but I don't think non-profits get taxed? I don't know much about this at all, but if I "donated" all the retirement funds to the non-profit maybe a way to shelter there?  This makes me think "tax evasion" not "tax avoidance"!

How do people shelter large amounts of money in the US?





jmwagner5

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Re: Avoiding Taxes in Retirement (US)
« Reply #1 on: March 15, 2017, 07:38:28 PM »

Thinking of strategies along the lines of starting a non-profit or something similar. Some income would go to charity (not a bad thing) and some to myself and spouse as officers, but I don't think non-profits get taxed? I don't know much about this at all, but if I "donated" all the retirement funds to the non-profit maybe a way to shelter there?  This makes me think "tax evasion" not "tax avoidance"!



It disgusts me to see non-profits abused in this sort of way.  It is one of the reasons why people don't want to donate time or money to non-profits because they know someone is simply using them to game the system. 

Txtriathlete

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Re: Avoiding Taxes in Retirement (US)
« Reply #2 on: March 16, 2017, 09:26:09 AM »

Thinking of strategies along the lines of starting a non-profit or something similar. Some income would go to charity (not a bad thing) and some to myself and spouse as officers, but I don't think non-profits get taxed? I don't know much about this at all, but if I "donated" all the retirement funds to the non-profit maybe a way to shelter there?  This makes me think "tax evasion" not "tax avoidance"!



It disgusts me to see non-profits abused in this sort of way.  It is one of the reasons why people don't want to donate time or money to non-profits because they know someone is simply using them to game the system.


Not sure how me using my own money for charitable purposes equates to asking others for money.

The idea for the private foundation is to conserve existing and future earnings not to solicit donations.

I hardly see how a self funded scholarship endowment is "disgusting".


Txtriathlete

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Re: Avoiding Taxes in Retirement (US)
« Reply #3 on: March 16, 2017, 09:40:08 AM »
If you plan to stop working before 70, your income will drop significantly at that time.  For example if you plan to retire at 60 (you should add this info to your case study - foreseeable future is unclear and working to age 70 is an alien concept on this board!), you can withdraw pre-tax money at that point.  Use it to fill the lower tax brackets with income.  Spend it or do Roth conversion.  Either way it allows you to smooth out the income rather than take huge RMDs.

Without going too far into the personal deets, it really won't drop, at least not enough to change tax liability implications. Think annuity payments as opposed to paychecks. Work isn't really work like most people think of it.

Yes a very first world problem.


Spork

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Re: Avoiding Taxes in Retirement (US)
« Reply #4 on: March 16, 2017, 11:40:19 AM »

At some point, when all the tax sheltered buckets are filled, I really don't think it's a big deal to have money in taxable accounts.  Even at very large incomes like yours, they're still tax advantaged.  If you're married and in the 33% bracket, the dividends/cap gains are still taxed at 15%.  To me that seems like a bit of a win -- market returns at half price taxes.

Deferred taxes are really not always what they're cracked up to be.  They are awesome if you actually defer them into a lower tax bracket.  Otherwise, I just don't see an advantage.  And RMDs seriously can be a problem.  They can force you into higher brackets.  Add a spousal RMD and an inherited IRA RMD... tax brackets can zoom up pretty fast. 
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Laura33

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Re: Avoiding Taxes in Retirement (US)
« Reply #5 on: March 16, 2017, 01:54:33 PM »
What Spork said.  Don't let the tax-avoidance tail wag the dog.  If you have an extra $70K to invest, put it in a low-cost ETF and let it ride, or if you really care, a tax-managed fund (just watch the fees); under either option, you will have very few CGs to deal with along the way, and they will be taxed at a much more favorable figure anyway.

Or invest it in real estate, be an active investor/manage your properties yourself, and take advantage of the plethora of tax breaks available there.
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