Author Topic: Avoiding Taxes in Retirement (US)  (Read 808 times)

Txtriathlete

  • 5 O'Clock Shadow
  • *
  • Posts: 53
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

  • 5 O'Clock Shadow
  • *
  • Posts: 35
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. 

bender

  • Pencil Stache
  • ****
  • Posts: 765
Re: Avoiding Taxes in Retirement (US)
« Reply #2 on: March 15, 2017, 08:58:13 PM »
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.

Txtriathlete

  • 5 O'Clock Shadow
  • *
  • Posts: 53
Re: Avoiding Taxes in Retirement (US)
« Reply #3 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

  • 5 O'Clock Shadow
  • *
  • Posts: 53
Re: Avoiding Taxes in Retirement (US)
« Reply #4 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.


bender

  • Pencil Stache
  • ****
  • Posts: 765
Re: Avoiding Taxes in Retirement (US)
« Reply #5 on: March 16, 2017, 11:20:25 AM »
Well this is a great problem to have!

So you don't need this money in your lifetime?  Should I send you my address, or is wire transfer good for you...  :)

What do you want to do with this money?  Pass it on to heirs or donate it?  I'm no expert on inheritances.  I received a small one that was in a pre-tax account and I had to pay income taxes on it when it was cashed out.  If your heirs will be in a lower tax bracket than yourself, it would mean lower taxes on that money.  I don't think this solves the RMD problem.

Any part of the pre-tax money you donate to a valid charitable foundation should be a tax-free event for you, since you won't benefit from the money.  Why would you set up your own charitable foundation?  Sounds like a lot of work, and ethically you shouldn't be looking to enrich yourself via such work.  I think this is what jmwagner was put-off by.  Financially I think you should consider donating the money the same as paying 100% tax on the money.  The difference is you can direct what charity the money goes to vs. into the federal government.

One path is to start taking distributions before 70 so you can smooth out the taxes, assuming you'll be in the high tax bracket for life.  But on the other hand, at 250k, you're already likely in the 33% bracket (231k-413k), depending on deductions and final AGI.  That bracket is quite large, so your RMDs aren't likely to cost you more in taxes.  Even if they did, the next bracket is only 35%, so it's not a huge jump.

As soon as I was eligible for penalty free withdrawals, I would start withdrawing enough to fill the entire 28% bracket (until AGI reaches 231k).  Of course the brackets change over time and tax law can change.  Once you hit the 33% bracket, I would not withdraw anymore - let that money continue to grow tax free.  Eventually you'll hit RMD and you'll just have to pay 33% on those withdrawals at that time.

One more question - what happens if you die?  Does the 250k stop?  What will your wife live on?  If 250k goes away, it would be nice to have more of that 401k available pre-tax, as she could draw on it and pay much lower taxes.





Spork

  • Walrus Stache
  • *******
  • Posts: 5697
    • Spork In The Eye
Re: Avoiding Taxes in Retirement (US)
« Reply #6 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. 
Some will sell their dreams for small desires
Or lose the race to rats
Get caught in ticking traps
And start to dream of somewhere
To relax their restless flight

Laura33

  • Pencil Stache
  • ****
  • Posts: 800
  • Location: Mid-Atlantic
Re: Avoiding Taxes in Retirement (US)
« Reply #7 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.
Laugh while you can, monkey-boy