Retirement thoughts Past Present Future

[Larry Caldwell]

Up to 85% of your SS can be taxed, based on your income level, but it's a sliding scale. Unfortunately, the scale hasn't been adjusted for inflation since Ronald Reagan, so it starts to kick in a a minimal income, like $30,000. Pension, RMDs, and dividends put my wife and me into the 85% with no way out.

The benefits tax goes back into SS, not the federal general fund. It is taxed at the same rate as your other income. Some states tax SS, but mine doesn't. States with a sales tax tax the stuff you spend it on.

 

[goeduck]

I am late joining this thread and scanned as much as I could, but I did not see anything on RMDs (Required Minimum Distributions) from IRAs. Has that been discussed? Age 72 is a long way away for me, but since I have 3 IRAs, including a self-directed Real Estate IRA, I should be thinking in advance.

 

[California]

Just remember if you try and roll a traditional 401K into a ROTH IRA, you'll be socked with taxes. If you roll it into a traditional IRA, you won't. You'll only be taxed on the withdrawals from the traditional IRA as you make them.

Some may think it's better to pay all the taxes on it now, as taxes are not likely to ever decrease. Some may not. So do your homework before you move anything.

Now that I'm old enough that the RMD, Required Minimum Distribution, is forcing more income subject to tax than I need to live on, I'm wondering if it might have been better strategy to do the maximum IRA > Roth conversions years ago.

And pay the tax on the IRA withdrawal at that time, before the money within the IRA compounded to a larger number that is now taxable each year as forced withdrawal.

The mandatory RMD is based on forcing you to cash out your entire 401/IRA balance within your estimated remaining lifetime so the forced withdrawals - and the tax on them - become massive, later on.

I don't know how to calculate the alternatives for massive taxable IRA > Roth conversion before retiring, contrasted with IRA withdrawal years later with greater tax consequences. But good retirement planning software likely has this conversion scenario built into the calculations by now. (As I've mentioned I used QuickBooks planning software 25 years ago when I was forecasting if I could afford early retirement).

Like Bearsixty7 above, I relied on IRA withdrawal to supplement my relatively small pension and wife's income (she loved her part time job) until I reached SS age. By that time investments were doing well so I put off starting SS until 67.

There was also some gimmick where my wife's SS was related to mine, I don't remember the details. But as I recall she delayed starting her own SS until age 70, several years after retiring, so so check this out.

Events since that initial planning have exceeded the software forecast. So that planning, putting in all the alternatives and letting the software solve for the outcome of each possible scenario, was more than worthwhile. I don't know which modern software is best for this retirement forecasting. Does anybody have a favorite?

 

[RustyA]

The 5 year rule is related to Roth conversions. If you convert a 401k or traditional IRA to a Roth you will owe full taxes on the amount converted in the year of the conversion. The funds that are now in the Roth will be unavailable for withdrawal for 5 years after the conversion. If you are 65+ when you convert the higher taxable income for that year will cause you to pay much more for Medicare part B for several years after conversion. Part B premiums are indexed for taxable income.

 

[California]

The 5 year rule is related to Roth conversions. If you convert a 401k or traditional IRA to a Roth you will owe full taxes on the amount converted in the year of the conversion. The funds that are now in the Roth will be unavailable for withdrawal for 5 years after the conversion. If you are 65+ when you convert the higher taxable income for that year will cause you to pay much more for Medicare part B for several years after conversion. Part B premiums are indexed for taxable income.

That sounds like an argument for making the conversions well before age 65 and just paying the extra taxes in the year of conversion.

 

[RustyA]

Yeah if you wait until 65 you'll be penalized on part B and can't use your money until after 70. Be sure to consult an advisor, I did and he suggested not doing a conversion for those reasons. Pay attention to part B income brackets when withdrawing taxable income from 401k or IRA.

 

[MossRoad]

Now that I'm old enough that the RMD, Required Minimum Distribution, is forcing more income subject to tax than I need to live on, I'm wondering if it might have been better strategy to do the maximum IRA > Roth conversions years ago.

And pay the tax on the IRA withdrawal at that time, before the money within the IRA compounded to a larger number that is now taxable each year as forced withdrawal.

The mandatory RMD is based on forcing you to cash out your entire 401/IRA balance within your estimated remaining lifetime so the forced withdrawals - and the tax on them - become massive, later on.

I don't know how to calculate the alternatives for massive taxable IRA > Roth conversion before retiring, contrasted with IRA withdrawal years later with greater tax consequences. But good retirement planning software likely has this conversion scenario built into the calculations by now. (As I've mentioned I used QuickBooks planning software 25 years ago when I was forecasting if I could afford early retirement).

Like Bearsixty7 above, I relied on IRA withdrawal to supplement my relatively small pension and wife's income (she loved her part time job) until I reached SS age. By that time investments were doing well so I put off starting SS until 67.

There was also some gimmick where my wife's SS was related to mine, I don't remember the details. But as I recall she delayed starting her own SS until age 70, several years after retiring, so so check this out.

Events since that initial planning have exceeded the software forecast. So that planning, putting in all the alternatives and letting the software solve for the outcome of each possible scenario, was more than worthwhile. I don't know which modern software is best for this retirement forecasting. Does anybody have a favorite?

Good question.

We converted our standard IRAs to ROTH IRAs the first that was available way back when. So no taxes on those since. But we'll have to open a standard IRA when the time comes to roll our 401Ks over. I don't think we want to take the huge tax hit by converting those to ROTH. I do not have ROTH 401K available, or I'd have done that a few years back.

 

[Larry Caldwell]

The IRS came up with new actuarial tables that reflect people living longer. They allow your 401k to last longer before it's exhausted. RMDs start a bit later and are a bit smaller. Not enough to last you past 90, though.

If you roll into a Roth, I don't think you have to do it all at once, but don't believe I know what I'm talking about.

I've been retired for 11 years now and am having no trouble maintaining my lifestyle. Stock, bonds, no debt, nice well maintained home, wife and I both have pensions with full survivor benefits, and
SS. Medicare supplemental insurance is not free, but partially subsidized by the pension plan. More money rolling in than we need.

 

[MossRoad]

The IRS came up with new actuarial tables that reflect people living longer. They allow your 401k to last longer before it's exhausted. RMDs start a bit later and are a bit smaller. Not enough to last you past 90, though.

If you roll into a Roth, I don't think you have to do it all at once, but don't believe I know what I'm talking about.

I've been retired for 11 years now and am having no trouble maintaining my lifestyle. Stock, bonds, no debt, nice well maintained home, wife and I both have pensions with full survivor benefits, and
SS. Medicare supplemental insurance is not free, but partially subsidized by the pension plan. More money rolling in than we need.

Way back when we converted our traditional IRA to ROTH we had the option of something like paying all the owed tax in one lump sum or spread it out over several years. As I recall, there was a minimal penalty for paying over several years, so we went that way at the time. I can't remember all the details, either, but I'd imagine there would be something similar today.

 

[California]

Somebody in the modern world can answer this but as I recall when I dealt with it long ago, you have to be employed to put money into an IRA or Roth. Could being retired, limit converting IRAs to Roth?