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3 Powerful Tax Strategies for Retirees

Discussion in 'TUG Lounge' started by MULTIZ321, May 7, 2018.

  1. MULTIZ321

    MULTIZ321 TUG Member

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    3 Powerful Tax Strategies for Retirees
    By Paul Sundin, CPA/ Taxes/ Kiplinger/ kiplinger.com

    "Retirees often overlook tax planning. This typically is because retirees are in one of the lower tax brackets and are living on fixed incomes that don’t provide a lot of tax or financial flexibility.

    But there are strategies that can lower the overall tax burden and enable seniors to sleep at night. Let’s take a closer look at three essential planning ideas...."

    [​IMG]
    Getty Images


    Richard
     
  2. x3 skier

    x3 skier Tug Review Crew: Rookie TUG Member

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    To Sum up the article (and many like it) pay a lot of tax now and hope you live long enough for the growth of the remainder will cover the tax you just paid. Also assume that tax law will never change and negate what you did years earlier.

    Or as I do, take what you need above what RMD is required when you need it and let your heirs worry about the taxes.

    Cheers
     
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  3. geekette

    geekette Guest

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    yeah, no kidding!

    I'm not anti-tax, I'm anti-prepay taxes. For myself, that is.

    I don't have a big fear of RMD, it's a reasonable requirement for money evading taxes for decades. It's retirement money, for cripes sake, time to slide some dough Out and pay for my life. That was always the plan. If RMD forces more out than I need, well, gee, what a great problem to have!

    The 401k deal was pre-tax on the way in, regular tax on the way out. I don't have a pressing need to escape my end of the deal. Especially pulling $ from elsewhere to convert IRA to Roth... nope, ain't gonna happen. I have a Roth, I don't need all retirement $ there. I have a Roth 401k, too, so it will get infused at end of this job or retirement, whichever comes first. I understand that Roth conversions are very popular, but not with me.

    It would be nice to have enough extra that donating hunks of IRA to charity would be feasible but we'll just cross that bridge if ever it is in sight...

    My retirement accounts are for my retirement. If I leave some dough behind, anyone whining about taxes can simply not claim their share. Income is taxable, not a new concept.
     
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  4. taterhed

    taterhed TUG Member

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    Good article with some interesting concepts.

    Depending on brackets, rates and potential snap-backs in the tax rates, it might be very interesting/beneficial to defer defined-plan annuity compensation for a few years to create a reduced-income pocket for conversion/withdrawal opportunity at significantly lower rates. I say this because the sunset window for TCJA is probably right after my retirement year. So, it might be possible to move some pre-tax income to a taxed status--prior to the snap-back of rates-- and defer some other defined-plan income for a year or two....thus saving a few percent of taxation and increasing the pension annuity etc....

    Thanks for the post.
     
  5. VacationForever

    VacationForever Tug Review Crew: Rookie TUG Member

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    There won't be a sunset, everyone loves a tax cut. It will be politically suicidal to not vote to extend TCJA.
     
  6. taterhed

    taterhed TUG Member

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    Your point noted; you are probably right. Of course, the opposite case could also be true.... careful management of withdrawals and/or conversions etc.... could be used to delay such tax events until an even more favorable tax opportunity (rates more beneficial than TCJA) is enacted vs immediate withdrawal or conversion upon retirement.
    In any case, it is a great reminder of the value of planning both before and after retirement to maximize your benefits and tax savings.
     
  7. Conan

    Conan TUG Review Crew: Elite TUG Member

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    The Roth conversion is tempting, but I was never comfortable prepaying the tax (and as a practical matter you need sufficient funds in other, taxable accounts from which to pay the tax).

    In hindsight, I could have/should have converted in 2010 when they changed the rules. Getting subsequent years of growth out of the tax base can save money not only on rmd tax but also on Medicare premiums which cost more if rmd income puts your AGI/MAGI into Medicare penalty tax brackets.
     
  8. bluehende

    bluehende TUG Review Crew: Veteran TUG Member

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    I always liked to run the numbers. With long term tax strategies and savings you can only do your best guess. I started putting money into retirement accounts before there was any tax benefits. Every new law changed my calculus, but only time will tell if I went the right way. I was always in the belief that saving tax at the time was the best strategy. I did convert some IRA's into Roth's when the law was passed. I believe there was some conversion advantage the first year or so. I always liked the fact that the tax savings were growing too. The endgame will be how long I live mostly. Those minimum withdrawals after 70 1/2 will start to get expensive tax wise at some point. At this point the max tax rate is probably right around where my savings was putting it away. If I live long and tax rates go up I would have been better off in a Roth. This is one contest I would be happy to lose. If I die tomorrow my kids win big. It also helps to remind yourself that if your biggest problem is you are paying a lot of taxes.....you actually have zero problems.
     
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  9. MOXJO7282

    MOXJO7282 Tug Review Crew: Rookie TUG Member

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    I really still don't get a how a Roth is that valuable except for young workers. I'm lucky to say I make a good wage now so I like the pre-tax aspect of the 401k and regular IRAs but also because I know that when this gravy train runs out I'm going to be making very little in retirement so wouldn't most want the pre-tax model because they expect to be in a much lower bracket in retirement then they are when they are fully employed and making real income.

    Who is ever is a higher tax bracket in retirement? What am I missing?
     
  10. VacationForever

    VacationForever Tug Review Crew: Rookie TUG Member

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    I think many may benefit from conversion from IRA to Roth during the period of retirement until MRD/RMD, where one pays some/lower taxes and be able to let the $ grow in Roth, with withdrawal tax-free after 5 years. It does not work for us but it may for some.
     
  11. Eric B

    Eric B TUG Member

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    I converted all our IRAs to Roth when the law was passed. In the first year, they let us pay the income taxes over two years, which helped in spreading the costs. In addition, this was pretty close to the bottom for the recession so my earnings on the conversion were lower than they would have been a few years on either side; the funds have all more than made up for the loss in value at the dip. For us, it's looking like we'll be in the same or near the same tax bracket after I retire; we've got several defined benefit pensions as well as traditional 401k accounts that we weren't able to convert then and I don't actually believe that the country will be able to leave the tax rates/brackets this low over the long term. In any case, the IRA withdrawals would be at the top marginal tax rate anyway since those are disbursals we can control and having that tax free instead will help a lot. Not sure it would have been worth doing if it wasn't for the dip in the market.
     
  12. zinger1457

    zinger1457 Guest

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    Many who retire early (50's) see their income pushing them into a higher tax bracket as social security, pensions and RMD's start to kick in during their 60's and 70's. In this case it makes sense to do ROTH conversions during the early years of retirement if you're in a lower tax bracket (12%) if you know that in a few years your income will push you into the 22% bracket.
     
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  13. vacationtime1

    vacationtime1 TUG Member

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    Suppose you have a lot of money -- more than you are going to ever spend. In other words, you are investing for your kids. So if you convert your IRA into a Roth IRA now, never withdraw any money from it (no RMD's on a Roth), and name your kids as death beneficiaries, your kids can take the withdrawals over their lifetimes. So they will get tax-free accumulations for perhaps another 50 years. That is powerful (it works even better if you name your grandkids as death beneficiaries).
     
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  14. isisdave

    isisdave TUG Member

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    My observations:

    1. RMDs start out at less than 4%, so if this amount of taxable income is a problem to you, you probably don't have any real problems. If you have to take out money and don't need to spend it, put it into a taxable account with growth stocks and you'll still come out ahead, especially if they continue to cut capital gains taxes.

    2. Planning to NOT leave money for your heirs, or as someone put it "spending the last dollar the day I die", simplifies a lot. And as we all know, you can plan all you want, but that's not how it's going to work out.
     
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  15. zinger1457

    zinger1457 Guest

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    Not sure I understand what you're trying to say. One of the components of good financial planning is to reduce the amount of taxes you pay to the IRS. I'd rather have my money sit in a ROTH account that's invested in growth stocks and I'm certain I won't have to pay any yearly capital gains or dividend taxes, or not take any RMD's if I don't need them.
     
  16. geekette

    geekette Guest

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    I've seen different parties run the numbers and there isn't a big diff in actual dollars and tax for Roth vs trad IRA. I think whatever a person has access to and is comfortable with makes sense. 401k was a blessing, allowing me to keep more of what I earned each and every year, and then match + many years extra contributions from employer. Roth showed up much later, limits are terribly low. If I work in retirement (PT fun job vs high paying stress job), I will keep on fully funding my Roth but I'd still contribute to a matching 401k (not sure PT work would bring a 401k).

    Higher tax bracket in retirement? If my devious plot hatched decades ago to board the slow road to wealth via dividend reinvestment works much better than expected, that could be me. I'll quit work when divs pay my bills (after house paid off) so in theory my income will be higher than salary pretty quickly, even with deferring SS to age 70. The more divs I can let reinvest in those early years of retirement, the larger the growing tidal wave. I guess I don't get too much heartburn over what tax I might pay if I have $1mil or $10mil in annual income. After tax take home still whacks bats out of those horrible min wage years. I can't think of a scenario in which I would owe more tax than I take as income, except converting 401k/IRA to Roth. Bats be whacking me in that situation.
     
  17. PigsDad

    PigsDad TUG Member

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    Remember, "Roth" does not necessarily equate to "Roth IRA". These days, many companies offer a Roth 401k option (with the higher contribution limits vs. IRA). When my daughter starts in the working world, I will definitely advise her to start our with the Roth 401k if she can. When she reaches higher tax brackets, then it might be better to start contributing to a pre-tax 401k to limit her taxable income.

    I would have loved having the Roth 401k option available to me when I was starting out my career. I see it as a hedge against higher tax rates in the future, and without getting political here, I think the writing is on the wall.

    Kurt
     
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  18. zinger1457

    zinger1457 Guest

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    There are ways to overcome the Roth contribution limits. Doing a backdoor Roth conversion is a common strategy, especially for high income earners whose income would normally not allow them to contribute to a Roth.
     
  19. PigsDad

    PigsDad TUG Member

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    Good reminder! We have been taking advantage of the backdoor Roth IRA contributions for several years now, and it is a great way to get extra $$ into our retirement accounts. However, it only works well if you don't have existing pre-tax IRA account, as if you do, the yearly contributions could trigger additional conversion taxes.

    Kurt
     
  20. CalGalTraveler

    CalGalTraveler TUG Member

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    @PigsDad Backdoor Roth looks interesting. Wish Roths were around when we started saving. We have non-deductible IRAs that have grown tremendously for the last 15 - 20 years i.e. 3x+ the contribution.

    I am assuming the non-deductible contribution would be 1:1 conversion so no tax but wouldn't our savings growth be taxed on conversion? I could set up a solo 401k for one of our businesses and roll into it but would that avoid the taxation on the earnings?
     
  21. PigsDad

    PigsDad TUG Member

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    As I understand it (but I'm no tax expert), you are correct that if you convert your non-deductible IRA to a Roth, the earning portion would be added to your taxable income in that year. I wouldn't see an advantage doing that, unless you think your marginal tax rate now is lower than it will be when you take the money out in retirement.

    I really have no idea about your second question, but it sounds interesting.

    Kurt
     
  22. geekette

    geekette Guest

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    If your goal is to reduce taxes to IRS, converting to a Roth puts you well behind that goal for a long time.

    I personally don't care about taxes. I have income, I pay tax. Laws change, life goes on, I have income, I pay tax.

    The tax tail does not wag my financial dog.
     
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  23. geekette

    geekette Guest

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    True enough, but for me, it does. There is 401k and IRA, Roth 401k and Roth (IRA). My shorthand. apologies for confusion. I have at least one of each of the above and a taxable portfolio, too. Eventually the 401k goes to IRA. Eventually the Roth 401k goes to Roth (IRA). Leaving me an IRA and a Roth plus taxable port.
     

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