Author Topic: Can you have to much in tax deferred accounts?  (Read 2227 times)

BTDretire

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Can you have to much in tax deferred accounts?
« on: January 01, 2018, 01:58:24 PM »
  I'm a bit humbled to be looking at a real first world problem, making to much money and trying to find a solution to avoid them.

I have about a 50/50 split between tax deferred accounts and regular savings.
I'm 62, my wife is 4 years younger.  Even with a conservative 5% growth from now until
RMDs are required at 70-1/2, we are looking at $50k in RMDs the first few years, add $36k SS
and $25k dividends, plus other income, we are looking at way more income than we need. And a big tax bill.
  I know I can do some Roth Conversions, but, that won't get even that $50k down to $40k.
 We could start gifting our two children, but that would require selling shares triggering  income or capital gains, and increased taxes now. 

Hmm, my question started out, should I stop putting money in tax deferred accounts,
then noted I have this tax problem looming in the future.
 So. I've shown my dilemma, any helpful thoughts? Other than telling me I should celebrate.
 I am very thankful.

BTDretire

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Can you have to much in tax deferred accounts?
« Reply #1 on: January 01, 2018, 02:00:18 PM »
  I'm a bit humbled to be looking at a real first world problem, making to much money and trying to find a solution to avoid them.

I have about a 50/50 split between tax deferred accounts and regular savings.
I'm 62, my wife is 4 years younger.  Even with a conservative 5% growth from now until
RMDs are required at 70-1/2, we are looking at $50k in RMDs the first few years, add $36k SS
and $25k dividends, plus other income, we are looking at way more income than we need. And a big tax bill.
  I know I can do some Roth Conversions, but, that won't get even that $50k down to $40k.
 We could start gifting our two children, but that would require selling shares triggering  income or capital gains, and increased taxes now. 

Hmm, my question started out, should I stop putting money in tax deferred accounts,
then noted I have this tax problem looming in the future.
 So. I've shown my dilemma, any helpful thoughts? Other than telling me I should celebrate.
 I am very thankful.

seattlecyclone

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Re: Can you have to much in tax deferred accounts?
« Reply #2 on: January 01, 2018, 02:08:43 PM »
Paying tax on that retirement savings was always part of the deal. Consider donating any unneeded part of your RMDs to a charity that does work that appeals to you.

maizeman

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Re: Can you have to much in tax deferred accounts?
« Reply #3 on: January 01, 2018, 02:15:18 PM »
We could start gifting our two children, but that would require selling shares triggering  income or capital gains, and increased taxes now. 

I believe you can gift your children appreciated stock directly without triggering capital gains (although of course their basis would be the same as what you paid for it).

Beyond that, I agree with seattlecyclone, you can always gift the excess income to charity if you don't need it and the goal is just to keep taxes down.

PaulMaxime

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Re: Can you have to much in tax deferred accounts?
« Reply #4 on: January 01, 2018, 02:50:35 PM »
Having to pay taxes isn't really a problem. It's something we all have to do.

What you should to is to compare the difference between paying taxes now and putting the money in the taxable account and deferring the taxes and paying them later.

This of course is based on your tax rate now and your best guess about your tax rate later. If the rates are the same then there's no real difference.

I personally think having a mix of qualified, taxable and roth assets is the best thing you can do to maintain flexibility of taxation later. But at some point the tax man is going to have his way with you.



Paul der Krake

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Re: Can you have to much in tax deferred accounts?
« Reply #5 on: January 01, 2018, 03:54:12 PM »
Why are you continuing to save any money?

lhamo

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Re: Can you have to much in tax deferred accounts?
« Reply #6 on: January 01, 2018, 04:13:58 PM »
You can easily eliminate 25k of that future annual income by shifting out of investments that pay dividends.   

If you are really so worried about the future tax hit, then balance it out by paying more in taxes now and shifting more to Roths before your RMD dates hit.   Do the conversions on the older spouse's accounts first.

The gifting option is a good one -- sell the stuff that is down or has low earnings to avoid a huge tax bill.  You don't get taxed on the basis so even if you are selling off 50k a year your cap gains on lower performing assets are not going to be huge.

BTDretire

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Re: Can you have to much in tax deferred accounts?
« Reply #7 on: January 01, 2018, 04:29:21 PM »
You can easily eliminate 25k of that future annual income by shifting out of investments that pay dividends. 
That was assuming 1.8% dividend in VTSAX
Quote
If you are really so worried about the future tax hit, then balance it out by paying more in taxes now and shifting more to Roths before your RMD dates hit.   Do the conversions on the older spouse's accounts first.

  Yes, that's the plan.
Quote
The gifting option is a good one -- sell the stuff that is down or has low earnings to avoid a huge tax bill.  You don't get taxed on the basis so even if you are selling off 50k a year your cap gains on lower performing assets are not going to be huge.
  Yes, I think this is going to be hard to do, we have savings that are 36 years old. But could start with later deposits and let the kids inherit old deposits at a new cost basis.

BTDretire

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Re: Can you have to much in tax deferred accounts?
« Reply #8 on: January 01, 2018, 04:39:58 PM »
Why are you continuing to save any money?
I guess I could buy a box of cigars, then light them with $100 bills!
 We earn more than we spend, use SEPs and an HSA to avoid taxes.
I've been really good at avoiding taxes, paid $870 tax on $105,000
total income last year.
  The party is about over, One kid is getting married, I lose the college
expenses/credits and a child credit. I expect to be paying more taxes going forward.
  It's a great problem to have. :-)

ritz

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Re: Can you have to much in tax deferred accounts?
« Reply #9 on: January 02, 2018, 12:42:30 PM »
Do you actually need this income to live off of? If not, I would donate your RMD to charity. If you do that, you're not taxed on it.

MDM

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Re: Can you have to much in tax deferred accounts?
« Reply #10 on: January 02, 2018, 12:52:17 PM »
should I stop putting money in tax deferred accounts
Depends on how much you would save by doing so.  If you will save 35% this year, traditional will still be better.  If you will save 10-12%, using Roth now is probably better.

Other thoughts:
- deferring SS until 70
- converting at least up to, and perhaps up through, the marginal rate you expect in retirement

Good luck!

BTDretire

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Re: Can you have to much in tax deferred accounts?
« Reply #11 on: January 03, 2018, 06:53:06 AM »
You can easily eliminate 25k of that future annual income by shifting out of investments that pay dividends.   

If you are really so worried about the future tax hit, then balance it out by paying more in taxes now and shifting more to Roths before your RMD dates hit.

 Worry is a little heavy, I just want to maximize what I keep. Yes, I'm leaning strongly towards
Roth conversions this year. I'll need to keep up to date and have a good idea of income vs
taxes owed so I'll now how much to convert to a Roth.
Quote
  Do the conversions on the older spouse's accounts first.

The gifting option is a good one -- sell the stuff that is down or has low earnings to avoid a huge tax bill.  You don't get taxed on the basis so even if you are selling off 50k a year your cap gains on lower performing assets are not going to be huge.

freya

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Re: Can you have to much in tax deferred accounts?
« Reply #12 on: January 03, 2018, 07:19:13 AM »
Taking a guess at how much you have in taxable and tax-deferred accounts based on the little bread crumbs in your posts...I'm given to wonder why you're still working.

If you retire now and defer taking social security until age 70, you could live off your taxable savings and Roth convert from tax-deferred up to the top of 15% (now 12%) tax bracket.  That will let you sell a chunk of your appreciated taxable investments annually and either spend or rebuy to establish a higher cost basis, and pay no capital gains tax.  Qualified dividends will also be tax free.

That's probably the best you can do.  If you continue to work and plan to stay in your current home, it wouldn't be unreasonable to limit retirement contributions to Roth, as your income now is close to what you are expecting in your RMD years.

BTDretire

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Re: Can you have to much in tax deferred accounts?
« Reply #13 on: January 03, 2018, 09:07:04 AM »
Taking a guess at how much you have in taxable and tax-deferred accounts based on the little bread crumbs in your posts...I'm given to wonder why you're still working.

If you retire now and defer taking social security until age 70, you could live off your taxable savings and Roth convert from tax-deferred up to the top of 15% (now 12%) tax bracket.  That will let you sell a chunk of your appreciated taxable investments annually and either spend or rebuy to establish a higher cost basis, and pay no capital gains tax.  Qualified dividends will also be tax free.

That's probably the best you can do.  If you continue to work and plan to stay in your current home, it wouldn't be unreasonable to limit retirement contributions to Roth, as your income now is close to what you are expecting in your RMD years.

 I work about about 15 hrs a week, although it was more over the holidays.
 I don't want to work! We have a small business my wife does not want to close.
She works about 70 hrs a week, I only work the 15 hrs to give her a day off and
help out on a busy morning.  This is now our slow time so I may skip the morning help.
 I can't get her to close the business, she thinks maybe the kids might need it, they aren't interested. If one gets accepted to dental school we will pay for that, but we still have enough.
 She's type A, probably better that she does work, on her day off she works harder then when she's working at the business.

WoodSpinner

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Re: Can you have to much in tax deferred accounts?
« Reply #14 on: January 03, 2018, 12:10:05 PM »
  I'm a bit humbled to be looking at a real first world problem, making to much money and trying to find a solution to avoid them.

I have about a 50/50 split between tax deferred accounts and regular savings.
I'm 62, my wife is 4 years younger.  Even with a conservative 5% growth from now until
RMDs are required at 70-1/2, we are looking at $50k in RMDs the first few years, add $36k SS
and $25k dividends, plus other income, we are looking at way more income than we need. And a big tax bill.
  I know I can do some Roth Conversions, but, that won't get even that $50k down to $40k.
 We could start gifting our two children, but that would require selling shares triggering  income or capital gains, and increased taxes now. 

Hmm, my question started out, should I stop putting money in tax deferred accounts,
then noted I have this tax problem looming in the future.
 So. I've shown my dilemma, any helpful thoughts? Other than telling me I should celebrate.
 I am very thankful.

If you dona’t Need the RMD income, investigate Qualified Charitable Deductions to reduce the RMD income and do some good for the world.

Otherwise:

- Hold your bonds in the Tax Deferred accounts and Tax efficient equity funds in your taxable.
- Roth Conversions- as long as you are paying less in marginal than what is expected during RMDs

Good luck

Derbtax

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Re: Can you have to much in tax deferred accounts?
« Reply #15 on: January 03, 2018, 12:36:16 PM »
You are thinking on the right track. When you eventually leave the IRA to your kids, they will owe tax on their own distributions as well.

You don't have to sell assets to gift to your children. You  can donate appreciated stocks/bonds/mutual funds to your children (28k each per year max). For a good chunk of it, consider holding onto it until you die, and the kids get a step-up in basis so they can sell tax-free.

Note that if they are under 18, they will have higher tax rates on dividends, and (if they sell), capital gains.

BTDretire

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Re: Can you have to much in tax deferred accounts?
« Reply #16 on: January 04, 2018, 02:54:36 PM »
You are thinking on the right track. When you eventually leave the IRA to your kids, they will owe tax on their own distributions as well.

You don't have to sell assets to gift to your children. You  can donate appreciated stocks/bonds/mutual funds to your children (28k each per year max).

If I gifted mutual fund shares to a child, what cost is it donated at?
If taxes are due, due to who?
 Both over 18.


[/quote]
 For a good chunk of it, consider holding onto it until you die, and the kids get a step-up in basis so they can sell tax-free.

Note that if they are under 18, they will have higher tax rates on dividends, and (if they sell), capital gains.
[/quote]

maizeman

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Re: Can you have to much in tax deferred accounts?
« Reply #17 on: January 04, 2018, 03:34:26 PM »
If you gift ($14,000/year) I believe the shares retain their original cost basis. If the child later sold them, they would own capital gains on the difference between what you purchased the shares for and what they sold them for.

Note that the gift limit (without using up your lifetime allowance) is per pair-of-people. So for example, I've heard that a married couple can gift up to $56,000/year to a child who is also married. $14,000 husband to child, $14,000 wife to child, $14,000 husband to child's spouse, $14,000 wife to child's spouse.

But this is not my area of expertise, so take everything with a giant grain of salt.

shawndoggy

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Re: Can you have to much in tax deferred accounts?
« Reply #18 on: January 04, 2018, 03:45:54 PM »
Note that if they are under 18, they will have higher tax rates on dividends, and (if they sell), capital gains.

doesn't the kiddie tax apply till age 24... at least if kids are in college?

https://www.irs.gov/taxtopics/tc553

BTDretire

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Re: Can you have to much in tax deferred accounts?
« Reply #19 on: January 04, 2018, 04:03:05 PM »
If you gift ($14,000/year) I believe the shares retain their original cost basis. If the child later sold them, they would own capital gains on the difference between what you purchased the shares for and what they sold them for.

 That's a new nightmare I'm starting to think about. I started investing in 1983 and will need to find my cost of a funds I have transfered maybe 6 times and also added more to at different times. I have about 8 years to come up with a cost basis.
Quote

Note that the gift limit (without using up your lifetime allowance) is per pair-of-people. So for example, I've heard that a married couple can gift up to $56,000/year to a child who is also married. $14,000 husband to child, $14,000 wife to child, $14,000 husband to child's spouse, $14,000 wife to child's spouse.

But this is not my area of expertise, so take everything with a giant grain of salt.

shawndoggy

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Re: Can you have to much in tax deferred accounts?
« Reply #20 on: January 04, 2018, 04:11:06 PM »
once your dental schooler turns 24, I think she would get the benefit of 0% capital gains tax on combined gains/income of 38600.  If you do gift to her and her income is lower that 38600, it'd make sense to liquidate up to that limit so as to reset gains (step up basis) on at least a portion of the assets gifted with built in gains.

maizeman

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Re: Can you have to much in tax deferred accounts?
« Reply #21 on: January 04, 2018, 05:06:47 PM »
If you gift ($14,000/year) I believe the shares retain their original cost basis. If the child later sold them, they would own capital gains on the difference between what you purchased the shares for and what they sold them for.

 That's a new nightmare I'm starting to think about. I started investing in 1983 and will need to find my cost of a funds I have transfered maybe 6 times and also added more to at different times. I have about 8 years to come up with a cost basis.


Depending on the ratio of the problematic funds to your overall network (and your regular charitable giving, if any), those are great shares to use for charitable donations. Put the the lot into a donor advised fund, take a charitable tax deduction for the whole value of the shares, and have the DAF send money out to any charities you'd normally donate to. Problem solved with no need to track down basis information.

But obviously this doesn't help you if the shares are a big chunk of your net worth.

seattlecyclone

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Re: Can you have to much in tax deferred accounts?
« Reply #22 on: January 04, 2018, 05:39:29 PM »
If you gift ($14,000/year) I believe the shares retain their original cost basis. If the child later sold them, they would own capital gains on the difference between what you purchased the shares for and what they sold them for.

 That's a new nightmare I'm starting to think about. I started investing in 1983 and will need to find my cost of a funds I have transfered maybe 6 times and also added more to at different times. I have about 8 years to come up with a cost basis.


Depending on the ratio of the problematic funds to your overall network (and your regular charitable giving, if any), those are great shares to use for charitable donations. Put the the lot into a donor advised fund, take a charitable tax deduction for the whole value of the shares, and have the DAF send money out to any charities you'd normally donate to. Problem solved with no need to track down basis information.

But obviously this doesn't help you if the shares are a big chunk of your net worth.

If you don't feel charitably inclined enough to give away all the shares you don't have documentation for, you could plan to make those shares be the ones you keep until you die. The basis would then reset, the shares would go to your heirs, and their taxes would be easier than if you give the shares to them during your life.

BTDretire

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Re: Can you have to much in tax deferred accounts?
« Reply #23 on: January 05, 2018, 12:44:41 PM »
If you gift ($14,000/year) I believe the shares retain their original cost basis. If the child later sold them, they would own capital gains on the difference between what you purchased the shares for and what they sold them for.

 That's a new nightmare I'm starting to think about. I started investing in 1983 and will need to find my cost of a funds I have transfered maybe 6 times and also added more to at different times. I have about 8 years to come up with a cost basis.


Depending on the ratio of the problematic funds to your overall network (and your regular charitable giving, if any), those are great shares to use for charitable donations. Put the the lot into a donor advised fund, take a charitable tax deduction for the whole value of the shares, and have the DAF send money out to any charities you'd normally donate to. Problem solved with no need to track down basis information.

But obviously this doesn't help you if the shares are a big chunk of your net worth.

If you don't feel charitably inclined enough to give away all the shares you don't have documentation for, you could plan to make those shares be the ones you keep until you die. The basis would then reset, the shares would go to your heirs, and their taxes would be easier than if you give the shares to them during your life.

 Does anyone here have paperwork going back 30+ years?
I probably do, but teasing out the info I need would be torture.

EricEng

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Re: Can you have to much in tax deferred accounts?
« Reply #24 on: January 05, 2018, 01:32:02 PM »
Just a note, but you can gift as much as you want up to about $5.5 million atm or $11million as a couple without worry.  If you exceed the $14k/year cap people are talking about you and the receiver don't get taxed, it just counts against that $5.5 million lifetime total and requires documentation in your taxes for that year. You can also gift the mutual funds and stocks without selling them.  Whatever brocker is holding the the funds/stocks for you will know how much they have gained.  Just imagine if you sold them yourself, the broker would have to know how much the gains were.

https://www.forbes.com/sites/deborahljacobs/2013/10/31/irs-raises-limit-on-tax-free-lifetime-gifts/#42a5468f2981

elysianfields

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Re: Can you have to much in tax deferred accounts?
« Reply #25 on: January 08, 2018, 01:27:49 PM »
Just a note, but you can gift as much as you want up to about $5.5 million atm or $11million as a couple without worry.  If you exceed the $14k/year cap people are talking about you and the receiver don't get taxed, it just counts against that $5.5 million lifetime total and requires documentation in your taxes for that year. You can also gift the mutual funds and stocks without selling them.  Whatever brocker is holding the the funds/stocks for you will know how much they have gained.  Just imagine if you sold them yourself, the broker would have to know how much the gains were.

https://www.forbes.com/sites/deborahljacobs/2013/10/31/irs-raises-limit-on-tax-free-lifetime-gifts/#42a5468f2981

The cited figures are all outdated due to inflation and now the new tax law.

Due to inflation, the annual non-taxable gift amount was already scheduled to increase to $15,000 in 2018.

The new tax law doubled the unified estate and gift tax exemptions to $11.2 million (individual) and $22.4 million (as a couple).

EricEng

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Re: Can you have to much in tax deferred accounts?
« Reply #26 on: January 08, 2018, 04:11:28 PM »
I knew they were out of the date, but that really wasn't the point I was getting at (because who cares if it is 11mill or 22mill?!).  I was just trying to show that you can exceed the "non-taxable gift amount" and still owe no taxes.  There is a lot of confusion on this aspect which leads people to jump through hoops trying to stay under that amount when exceeding it has no impact for 99.999% of people.

elysianfields

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Re: Can you have to much in tax deferred accounts?
« Reply #27 on: January 09, 2018, 01:47:16 PM »
I knew they were out of the date, but that really wasn't the point I was getting at (because who cares if it is 11mill or 22mill?!).  I was just trying to show that you can exceed the "non-taxable gift amount" and still owe no taxes.  There is a lot of confusion on this aspect which leads people to jump through hoops trying to stay under that amount when exceeding it has no impact for 99.999% of people.

Apparently the Congress and their patrons care, or they wouldn't have changed the exclusion amounts!

I agree that most people, especially under the new, higher exclusion amounts, don't need to worry, and I wasn't picking on you personally.  Multiple posters quoted the old figures and I wanted to correct them, and since yours was the most recent one with the obsolete figures, I quoted you.  Apologies if you got a different impression.

EricEng

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Re: Can you have to much in tax deferred accounts?
« Reply #28 on: January 09, 2018, 04:47:55 PM »
I knew they were out of the date, but that really wasn't the point I was getting at (because who cares if it is 11mill or 22mill?!).  I was just trying to show that you can exceed the "non-taxable gift amount" and still owe no taxes.  There is a lot of confusion on this aspect which leads people to jump through hoops trying to stay under that amount when exceeding it has no impact for 99.999% of people.

Apparently the Congress and their patrons care, or they wouldn't have changed the exclusion amounts!

I agree that most people, especially under the new, higher exclusion amounts, don't need to worry, and I wasn't picking on you personally.  Multiple posters quoted the old figures and I wanted to correct them, and since yours was the most recent one with the obsolete figures, I quoted you.  Apologies if you got a different impression.
I find the new amounts fairly ridiculous since they affected so few to begin with (.4% I read somewhere).  Anyway know what happens if the exemption amount is lowered by a new govt down the road to a value lower than what you have already gifted?  IE: Gift 5 mil and then 5 years later they reduce the exemption back to $1mill?

seattlecyclone

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Re: Can you have to much in tax deferred accounts?
« Reply #29 on: January 09, 2018, 04:58:06 PM »
I knew they were out of the date, but that really wasn't the point I was getting at (because who cares if it is 11mill or 22mill?!).  I was just trying to show that you can exceed the "non-taxable gift amount" and still owe no taxes.  There is a lot of confusion on this aspect which leads people to jump through hoops trying to stay under that amount when exceeding it has no impact for 99.999% of people.

Apparently the Congress and their patrons care, or they wouldn't have changed the exclusion amounts!

I agree that most people, especially under the new, higher exclusion amounts, don't need to worry, and I wasn't picking on you personally.  Multiple posters quoted the old figures and I wanted to correct them, and since yours was the most recent one with the obsolete figures, I quoted you.  Apologies if you got a different impression.
I find the new amounts fairly ridiculous since they affected so few to begin with (.4% I read somewhere).  Anyway know what happens if the exemption amount is lowered by a new govt down the road to a value lower than what you have already gifted?  IE: Gift 5 mil and then 5 years later they reduce the exemption back to $1mill?

That's up to Congress. My guess would be they'd say "good for you doing some tax-free giving under the old limits, but now you're over the new limits so your estate tax exemption is now zero."