Author Topic: Financial planner or tax accountant? RMDs, SS,taxes  (Read 2254 times)

Workinghard

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Financial planner or tax accountant? RMDs, SS,taxes
« on: July 16, 2014, 08:24:09 AM »
After reading posts about taxes and RMDs and SS, I realize I'm in over my head and I'm totally lost.
Current tentative plans and timeline:

Assumptions:
Combined current income: ~130k
Spouses Current 401k/rollover IRA: 350k, contributing 17,500 yr
My 401k: eligible this year, contib. 23k, but also 60k in rollover IRAs
Rest of portfolio: Roths, after tax contributions index funds, home that will be sold so we can downsize


4/2016: spouse eligible for Medicare
5-6/2016: max out 401k before retiring (but now questioning that), retires, ? Per diem
2017: spouse fully retired, my income unknown. 50-60k (or less) depending on FT or per diem, or ? retirement
2018: I retire, no income
2019: combined SS ~ 25K
2020:  combined SS ~ 25K
2021:  combined SS ~ 49k, when spouse draws own benefit at 70
4/2022: 1st RMD due
 
4/1/2028: my first RMD due

I have no idea if we should do Roth conversions, or when, or the amount, or taxes, or anything else. I finally reached a point of getting our portfolio balanced and comfortable with our AA, but lost on the rest. Not sure if I should go to someone or what type of questions to ask.

« Last Edit: July 16, 2014, 10:57:25 AM by Workinghard »

dandarc

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Re: Financial planner or tax account? RMDs, SS,taxes
« Reply #1 on: July 16, 2014, 10:32:04 AM »
Not enough information here to be too specific, but if you are very concerned with RMDs, you have to pick a tax bracket you are comfortable with paying today to mitigate the risk.  Lets say you have $50,000 in other taxable income (on top of any deductions), and you are OK with paying 15% taxes today.  The 15% bracket caps out at $73,800, so you would convert $23,800 to Roth for this year.  Do this type of thing each year until the accounts in question are fully converted, or you decide to change strategies, or the RMDs kick in.  You can continue convert amounts over the RMD once they start, but the RMD itself cannot be converted.

If you are OK with paying 25% taxes today to mitigate the risk of the RMDs becoming a problem, then you can convert until your income is up to $148,850.  I personally wouldn't do that, but if you think you are likely to be paying a lot more than 25% taxes on this money down the road, then maybe it is worth it to you to pay that much in taxes today.

I also think you might be worrying about this unnecessarily - if you had to take an RMD today on your ~410,000 in retirement accounts, even if you were already 92 years old, the RMD would be less than $41,000 - you probably would need at least some of this amount to supplement your SS income anyway, and it wouldn't, by itself, push you past the 25% bracket (or even into the 25% bracket).  And if you really don't need a particular RMD in a given year, you can donate it to charity if your goal is to avoid taxes.  Or pay the taxes and buy some more funds in your taxable account if you want to leave more to heirs.

I guess my point is, the RMDs aren't as big a deal as some fear.  If you were going to have many millions of dollars in 401Ks it might become an issue, but at more typical levels the dollars and cents aren't that big of a deal, even if you get hit .  If you really don't want to make them for convenience sake, or because you think your taxes are going to go up so much that the math will work out, you have to draw a line in the sand of how much tax you are willing to pay today, and convert up to that line but no further.  For me, I might consider going up to the top of the 15% tax bracket, but certainly would not be converting in a higher bracket.  You've just got to decide where that line is for you, and proceed accordingly.

Bobberth

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Re: Financial planner or tax accountant? RMDs, SS,taxes
« Reply #2 on: July 16, 2014, 12:45:50 PM »
Here's a link to the RMD factors: http://www.bankrate.com/finance/money-guides/ira-minimum-distributions-table.aspx

So the year your spouse turns 70.5, they will take the balance of all retirement accounts on dec 31 and divide by 27.4 to find their RMD.  For the next year they divide Dec 31 value by 26.5 and so on.  Once you turn 70.5, you will start figuring your RMDs in the same way.

The only reason to worry about doing a roth conversion or withdrawals earlier than 70.5 is if you are in a lower tax bracket now than you will be once RMDs begin.  This could be from significant pensions/other income or if your retirement accounts have very large balances. And even then you will need to balance how much you convert or withdraw to avoid from bumping up into a higher bracket or you give up any advantage you are trying to accomplish.  I don't think that you will be in the ballpark of retirement balances that would require any special tax planning if SS is your only other income source.

Workinghard

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Re: Financial planner or tax accountant? RMDs, SS,taxes
« Reply #3 on: July 16, 2014, 02:25:10 PM »
Thanks for the responses. I guess I started questioning everything after reading a post on the bogleheads with a chart on RMDs and SS and the tax implications.  It's on page 2.

http://www.bogleheads.org/forum/viewtopic.php?f=2&t=142366&start=50

I would have asked over there but sometimes the answers are over my head, nor am I articulate in my questions which compounds the problem.

All in all, our portfolio will probably be around 1m+ made up of 401ks, Roths, after tax contributions, and our home.  I know we won't be in a higher tax bracket after retirement and will only have a few years before we start taking SS during which time we "may" be in a lower tax depending on whether or not I work.

Although I know the goal is 0 taxes, I'm fine with 15%. It's less than what we're paying now.

dandarc

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Re: Financial planner or tax accountant? RMDs, SS,taxes
« Reply #4 on: July 16, 2014, 03:43:17 PM »
Yeah that chart looks to be in the context of taking SS early vs late.  The reality is not so clear cut.  So you have two people who are both 70 and for some reason want 60K in taxable income - one started taking SS at 62 and so gets 23K per year, the other waited until 70 so he gets 40K per year.  So guy 1 has to take out 37K from his IRA to cover the gap, and guy 2 only 20.  Because of the way that SS benefits are taxed, Guy 1 has to pay $4200 more in federal tax this year than Guy 2!  So clearly the conclusion  has to be to wait till you are 70 right?  As Lee Corso might say, "Not So Fast".

Guy 1 has had the benefit of having received 23K per year for 8 years from the government while Guy 2 received 0.  That's 184,000 before tax AND Guy 1 paid less tax than Guy 2 for those 8 years for the same reason that Guy 2 is paying less now - only a portion of SS benefits are taxable vs 100% of traditional IRA withdrawals being taxable.  Going to take a while for Guy 2's 4K per year in tax savings + 17K in extra SS benefits to catch up to Guy 1's money already received.

Not that the point is that taking the money at 62 is the best course of action - you need to run these types of calculations for yourself and your specific situation to know, and it is still a crap-shoot - die at or before 61 and it doesn't matter what your plan was regarding SS.  The point being that chart is misleading because it ignores 100% of the positive side of one choice, and 100% of the negative side of the other - all it shows is the difference in taxes in one year, when to even get to that year you've gotta go through 8 years of the decision being heavily in favor on the other side.

Workinghard

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Re: Financial planner or tax accountant? RMDs, SS,taxes
« Reply #5 on: July 16, 2014, 04:31:38 PM »
Thanks for your perspective on the chart , dandarc. Based on the T Rowe Price SS calculator, and running the different scenarios, it looks like the best option is for me, the younger and lower earner to file at 62 and get around 15k a year and for my husband to file for spousal benefits and get around 10k a yr. At 70 he would then file for his benefits and get about 35k. This would take place 2019 and 2021 respectively since he's 6 years older than me.

Do you think it would be worthwhile to max out his 401k the year he's going to retire? He could have 100% of his paychecks going to it until he changes his status.

Essentially he's looking at retiring 2016. We'll have 3 yrs before SS starts although I'll still be working at least part of that time.

dandarc

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Re: Financial planner or tax accountant? RMDs, SS,taxes
« Reply #6 on: August 11, 2014, 05:14:10 PM »
Thanks for your perspective on the chart , dandarc. Based on the T Rowe Price SS calculator, and running the different scenarios, it looks like the best option is for me, the younger and lower earner to file at 62 and get around 15k a year and for my husband to file for spousal benefits and get around 10k a yr. At 70 he would then file for his benefits and get about 35k. This would take place 2019 and 2021 respectively since he's 6 years older than me.

Do you think it would be worthwhile to max out his 401k the year he's going to retire? He could have 100% of his paychecks going to it until he changes his status.

Essentially he's looking at retiring 2016. We'll have 3 yrs before SS starts although I'll still be working at least part of that time.

Sorry I lost track of this thread - depends on the tax bracket at that time, but I'm generally all for sheltering as much as you can when the taxes are high.  Looking at how soon you're looking at retiring and the account balances, I think you might just decide to not worry so much about the required minimum distributions - even if they do come up it won't be that big a deal.  Shelter as much as you can while still earning a lot, because you know how much you're saving today.

You also might want to do some research on Single Premium Immediate Annuities (SPIA) - might be a way to insure your baseline income in retirement beyond whatever SS comes up with.  Looks like you might be in that middle ground where these things make sense.  They are too expensive if you've got very small retirement savings, and often not the best use of money if you've got lots of money.  Looking at the numbers you might fall into a spot in the middle where it is advantageous to buy a traditional pension to supplement that (this is essentially what you are doing when you buy a SPIA).  As always, be sure to run your numbers yourself.