Author Topic: Taxes in retirement  (Read 4487 times)

Zebra

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Taxes in retirement
« on: January 14, 2015, 05:38:01 AM »
Hello,
Delurking to ask a tax question.

I'm preparing to retire in 12 years when I'll be 55 years old. The earliest I can retire and still qualify for my full pension is at 50, but it's extremely unlikely I'll be FI by then.

My current savings goal is based on anticipated spending of $48,000 per year in retirement, without regard to taxes. I'm trying to estimate my taxes so I can ensure my savings are sufficient to cover $48,000 spending + taxes.

Here are my sources of retirement funds, and my assumptions/understandings about when I can start withdrawals/distributions and their taxability:
  • taxable investment account: withdraw at any time; only the gains and dividends are taxable income
  • rIRA: withdraw contributions at any time; withdraw gains after 59 1/2; nothing is taxable
  • TSP: if I leave service the year I turn 55 or later, withdraw funds at any time after leaving with no penalty (I think); all withdrawals are taxable
    • I can roll this over into a rIRA or tIRA in a lump sum or over time up to 10 years. If I do the Roth rollover over time, the tax liability would be spread out over 10 years. I'm not sure if rolling over into a tIRA and doing a conversion over a longer period of time would be better. The balance should be at least $1 million by the time I retire.
    • I could just buy a TSP annuity with the funds or set up monthly withdrawals, in which case the payments would be taxable, and I would have access to the money immediately instead of waiting until 59 1/2 or the 5-year holding period.
  • Pension: starts at 60; currently eligible for about $15,000 per year, but if I continue working until 55, it will pay closer to $28,000 per year; taxable
  • Social Security: starts at 62 or later; might be taxable
  • HSA: I have just started researching HDHPs/HSAs, and may start going this route next year; distributions for qualified expenses not taxable; distributions for non-qualified expenses after 65 are taxable without penalty.

All advice and strategies welcome. Feel free to correct any errors in my assumptions.


zolotiyeruki

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Re: Taxes in retirement
« Reply #1 on: January 14, 2015, 06:39:27 AM »
That's a lot of good, detailed information.  A couple questions will help:
1)  are you single? married filed jointly?
2)  will you plan to take the standard deduction, or will you itemize?
3)  in what state do you live? state income taxes are deductible, if you itemize
4)  what's your current income?
5)  how much do you currently have saved in the various areas (tIRA, rIRA, etc)?  And how much you expect to receive from SS?

chuckaluck

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Re: Taxes in retirement
« Reply #2 on: January 14, 2015, 07:00:55 AM »
Also will you have a totally paid for home, or have mortgage interest to deduct?  Do you think you'll be working part time?  Are you living in a state that does not tax retirement benefits? 
« Last Edit: January 14, 2015, 07:04:11 AM by chuckaluck »

Eric

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Re: Taxes in retirement
« Reply #3 on: January 14, 2015, 10:38:13 AM »
  • taxable investment account: withdraw at any time; only the gains and dividends are taxable income
  • TSP: if I leave service the year I turn 55 or later, withdraw funds at any time after leaving with no penalty (I think); all withdrawals are taxable

Note that these are two different types of "taxable".  The capital gains from your investment account will be taxed at the capital gains rate, whereas the withdrawals of pre-tax money will be taxed as regular income.  But if you stay in the 15% income tax bracket, the capital gains rate is zero.  So depending on your balances, you can mix and match to set up the most favorable tax treatment.  You should also consider rolling over T-IRA money into a Roth-IRA when you have available "space" in your income.

Check out this post for some ideas:

http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/

Catbert

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Re: Taxes in retirement
« Reply #4 on: January 14, 2015, 01:15:02 PM »
You are correct that you can withdraw from TSP without penalty if you separate from the Federal government in the year you turn 55 (or after).  You still pay regular income tax, of course.  You lose this flexibility if you convert it to an IRA.

Don't buy an annuity with your TSP money unless interest rates are substantially higher than they are now.  And probably not even then.

I congratulate you on staring long-term tax planning.  I'm not sure if you are married or single (or if this is likely to change in the future) so I can't provide much specific advice.  Become familiar with your current marginal rates and what those rates would be on your retirement spending.  Are they different or the same?  Are you in the 15% bracket now?  If so, harvest capital gains each year to fill up the 15% bracket and get taxed 0%.

If you're going to do Roth conversions then get them done BEFORE you take social security.  They can cause more of your SS to be taxed

DoubleDown

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Re: Taxes in retirement
« Reply #5 on: January 15, 2015, 07:33:04 AM »
6) Per SSA.gov, estimated SS benefits if taken at age 62: $1,731/mo; if taken at age 67: $2,567/mo.

You may already be aware of this but, just in case, keep in mind that the basic estimate the SSA gives you assumes you will continue working until retirement age, earning your current salary. To get a more accurate figure, you can use the estimating tool on their website putting in "zeroes" for income in all the years between now and when you can withdraw. There will be a reduction in your benefit with the zero years, but how much will depend on your own earnings history.

zolotiyeruki

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Re: Taxes in retirement
« Reply #6 on: January 15, 2015, 08:55:18 AM »
1) Single, and do not expect this to change.
2) Assume standard deduction after retirement. I'm hoping things will work out that I'll be able to sell my current home when I retire and have sufficient proceeds to buy a new home with cash or a very small mortgage.
3) I plan to move out of state upon retirement, but not sure where. Definitely could be in a state without income taxes.
4) $117,000 current income
5) TSP: $285,000; rIRA $42,000; taxable investment account: $10,000; no tIRA
6) Per SSA.gov, estimated SS benefits if taken at age 62: $1,731/mo; if taken at age 67: $2,567/mo.
7) Do not expect to work after retiring.
8) In 2013, I hit the 28% bracket for the first time and expect to reach it for 2014 as well, but I was not maxing out the TSP in those years (can't change the past). So hopefully starting with 2015 I'll be back in the 25% bracket.

Well, here's what I'd suggest:
1) max out your TSP ($17,500) and then your traditional IRA ($5500) EDIT:  phased out of the deduction, so never mind.  You need to get out of those higher tax brackets ASAP.  If you also have access to an HSA, do it.  Given that you're a single filer, it'll be a lot harder to drop into lower tax brackets, but that would be my first step.
2) consider itemizing your deductions, if you don't already.  I don't know your current housing situation, but if you own and have a mortgage, both your property taxes and mortgage insurance are deductible.  So is your state income tax or sales tax.  Those will help drive down your tax liability as well.
3) If you have more money to save after step 1 (and you should!), I'd put it in taxable accounts (to help build your Roth Ladder later), or find some other lucrative investment (rental real estate seems to be popular around here).
« Last Edit: January 16, 2015, 11:04:05 AM by zolotiyeruki »

Catbert

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Re: Taxes in retirement
« Reply #7 on: January 15, 2015, 12:28:08 PM »
Definitely don't do any Roth conversions until after you're retired.  Stay in the traditional TSP and tIRA - Roth's are not for you at this point.

If you make significant charitable contributions then consider doing them with appreciated stock/mutual funds.  You get the tax deduction but don't have to pay 15% capital gains on the appreciation.  Fidelity has a Charitable Gift Fund that makes this simple.  I assume other fund companies do also.  Then take the cash you would have given to the charity and put it back in the market.

Zebra

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Re: Taxes in retirement
« Reply #8 on: January 16, 2015, 04:39:38 AM »
For those of you advocating a traditional IRA, does this advice hold if I am completely phased out of the deduction for contributions? Even after maxing out my TSP, my AGI will be too high for the deduction. Better to stick with Roth IRA in these circumstances?

For the TSP, I'm still wondering what to do with it when I retire in 12 years at age 55.
If I start taking monthly distributions right away, at age 70.5 they will automatically increase to the required minimum. Would a rollover to IRA and then conversion to Roth be better? If I max out the account for the next 12 years and get a decent return the balance should be around $1 million. There is talk about allowing in-plan conversions to Roth TSP at some point in the future, but who knows when/if that option will be available.

Based on DoubleDown's advice, I recalculated my estimated Social Security to take into account lack of earnings after age 55. The benefit at age 62 dropped by $700 per month; but if I wait until 67, there's basically no change in the benefit.

MDM

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Re: Taxes in retirement
« Reply #9 on: January 16, 2015, 10:57:52 AM »
For those of you advocating a traditional IRA, does this advice hold if I am completely phased out of the deduction for contributions? Even after maxing out my TSP, my AGI will be too high for the deduction. Better to stick with Roth IRA in these circumstances?

For the TSP, I'm still wondering what to do with it when I retire in 12 years at age 55.

Your thoughts on the tIRA are correct - it makes no sense to contribute non-deductible amounts when you can simply do a Roth.

For the TSP, you might wait ~10 years (still giving you 2 years to plan) before deciding anything.  A lot can change in that time.

zolotiyeruki

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Re: Taxes in retirement
« Reply #10 on: January 16, 2015, 11:03:04 AM »
For those of you advocating a traditional IRA, does this advice hold if I am completely phased out of the deduction for contributions? Even after maxing out my TSP, my AGI will be too high for the deduction. Better to stick with Roth IRA in these circumstances?

Good catch--I had missed that aspect, and stand corrected :)