Retirement SOS: Finance question

[tvguy]

If you were in a 32% tax bracket you would not have been eligible to contribute to a Roth directly anyway and your IRA would also would most likely not be tax deductible either if you participated in your employer's 401(k).

The 32% tax bracket for income is Over $364,200 but not over $462,500 for married filing jointly or over $182,100 but not over $231,250 for a single filers. The phase out amount is $136,000 for married filing joint or $83,000 for singles to contribute to an IRA and get the tax deferral benefit. If you were in this category, your financial advisor should have had you doing a backdoor roth IRA, so that way it will grow tax free.

That very well could be. The rules governing all types of IRAs are constantly changing. Seems like when too many people take advantage of a tax break, Congress eliminates it.
I remember sitting in a (traditional) IRA seminar with a Financial Planner back in 1979 and he said......at that time......you could withdraw money from your IRA to pay medical bills, buy a house, buy a car, or fund your child's college education without penalty. Not anymore.
My mom started her RMD in 1993. RMDs are calculated on the account holders life expectancy. Back then you could use your presumably younger beneficiary's age to lower your RMD. With that option gave me the option when my mom passed of either cashing in the IRA, or continuing the same RMD she had been taking. So for the past 10 years I have been getting RMD's from her IRA. Now, beneficiaries must withdraw and pay taxes on the entire IRA amount within 10 years.

 

[GAN]

Well, it's a little more complicated than that. My entire retirement plan is based on deferring taxes until AFTER I retired, because I am in a MUCH MUCH lower tax bracket now.. I hate taxes too, which is why my Financial Planner set things up without a Roth IRA. The money you put into a ROTH you paid taxes on. The money I put into a traditional IRA has no tax so I could put more money in, and earn more money. The money you paid years ago in taxes was earning income for me. I was in a 32% Federal Tax Bracket when I was working. I'm in a 12% tax bracket now.

There's a definite "value" in paying tax now versus later -by avoiding future(and probable) bracket adjustments. The other factor is YOU will be paying tax on ALL your earnings, while someone in a ROTH will NOT. I've gotten "lucky" in the sense my Roth value is almost 50% of my taxed investment and is 100% protected from taxes. Off the top of my head(it's much more complex than this but...) If you took $100k tax-deferred and doubled it over life you'd earn $176k after your 12% tax on $200k. If I invested $100k over life and doubled it, I would earn $168k less my "cost" of tax @ $32k. And that's considering a person in the 32% bracket which means you'd earn over $180k per year ...hardly the average salary even these days. I'm thinking more would fall into a 24% bracket which makes a Roth look the same.

 

[john7994]

That very well could be. The rules governing all types of IRAs are constantly changing. Seems like when too many people take advantage of a tax break, Congress eliminates it.
I remember sitting in a (traditional) IRA seminar with a Financial Planner back in 1979 and he said......at that time......you could withdraw money from your IRA to pay medical bills, buy a house, buy a car, or fund your child's college education without penalty. Not anymore.
My mom started her RMD in 1993. RMDs are calculated on the account holders life expectancy. Back then you could use your presumably younger beneficiary's age to lower your RMD. With that option gave me the option when my mom passed of either cashing in the IRA, or continuing the same RMD she had been taking. So for the past 10 years I have been getting RMD's from her IRA. Now, beneficiaries must withdraw and pay taxes on the entire IRA amount within 10 years.

And beneficiaries need to take a distribution in place of the deceased for the same year in which they died (if one had not been taken already for the year).

 

[princesscinderella]

That very well could be. The rules governing all types of IRAs are constantly changing. Seems like when too many people take advantage of a tax break, Congress eliminates it.
I remember sitting in a (traditional) IRA seminar with a Financial Planner back in 1979 and he said......at that time......you could withdraw money from your IRA to pay medical bills, buy a house, buy a car, or fund your child's college education without penalty. Not anymore.
My mom started her RMD in 1993. RMDs are calculated on the account holders life expectancy. Back then you could use your presumably younger beneficiary's age to lower your RMD. With that option gave me the option when my mom passed of either cashing in the IRA, or continuing the same RMD she had been taking. So for the past 10 years I have been getting RMD's from her IRA. Now, beneficiaries must withdraw and pay taxes on the entire IRA amount within 10 years.

I agree a lot has changed since 1979

 

[tvguy]

I agree a lot has changed since 1979

And in the back of my head that is one of my concerns with Roth IRAs. Will the rules on taxes remain the same? If too many people are saving too much money on taxes, will Congress change the rules?

 

[tvguy]

There's a definite "value" in paying tax now versus later -by avoiding future(and probable) bracket adjustments. The other factor is YOU will be paying tax on ALL your earnings, while someone in a ROTH will NOT. I've gotten "lucky" in the sense my Roth value is almost 50% of my taxed investment and is 100% protected from taxes. Off the top of my head(it's much more complex than this but...) If you took $100k tax-deferred and doubled it over life you'd earn $176k after your 12% tax on $200k. If I invested $100k over life and doubled it, I would earn $168k less my "cost" of tax @ $32k. And that's considering a person in the 32% bracket which means you'd earn over $180k per year ...hardly the average salary even these days. I'm thinking more would fall into a 24% bracket which makes a Roth look the same.

Everyone is different. My mom and I used the same Financial Advisor and mom did the same thing my wife and I did.....defer taxes until as late in life as you can. It worked very well for her in 28 years of retirement. The other component was having no debt. My wife and I cheated on that, taking a car payment into retirement, but that loan will be paid off in February.

 

[princesscinderella]

And in the back of my head that is one of my concerns with Roth IRAs. Will the rules on taxes remain the same? If too many people are saving too much money on taxes, will Congress change the rules?

One can only hope that the existing Roth IRAs would be grandfathered in if such a change is made. I think more likely they would no longer offered a Roth at all if that was the case and a traditional IRA would be the only thing available. Too many politicians benefit from Roth and the backdoor conversions that I doubt it will go away. Closinging the backdoor conversion loophole maybe.

For all reading this the backdoor loophole for a Roth if you make too much money: You contribute typically two years of IRAs at one time between Jan-Apr. You can contribute for the previous years IRA up until April 15 and can start contributing for the current year on Jan 1st. This works the best if you fully fund the entire amount in one go as its a lot more work to do it on a monthly basis when you make a partial contribution. Once they are funded and cleared in the IRA the money added immediately converted into Roth IRA account where then you would then purchase securities with it. It never has a chance to have any gains so you don't pay extra taxes on it and you already had to pay on the traditional IRA already. We utilize this strategy with our advisor and it works great. A HSA is amazing too if you have the ability to contribute to one with a high deductible health insurance plan.

 

[tvguy]

One can only hope that the existing Roth IRAs would be grandfathered in if such a change is made. I think more likely they would no longer offered a Roth at all if that was the case and a traditional IRA would be the only thing available. Too many politicians benefit from Roth and the backdoor conversions that I doubt it will go away. Closinging the backdoor conversion loophole maybe.

For all reading this the backdoor loophole for a Roth if you make too much money: You contribute typically two years of IRAs at one time between Jan-Apr. You can contribute for the previous years IRA up until April 15 and can start contributing for the current year on Jan 1st. This works the best if you fully fund the entire amount in one go as its a lot more work to do it on a monthly basis when you make a partial contribution. Once they are funded and cleared in the IRA the money added immediately converted into Roth IRA account where then you would then purchase securities with it. It never has a chance to have any gains so you don't pay extra taxes on it and you already had to pay on the traditional IRA already. We utilize this strategy with our advisor and it works great. A HSA is amazing too if you have the ability to contribute to one with a high deductible health insurance plan.

Yes, we can only hope. But like I posted earlier, IRAs have changed a lot since they were first introduced

 

[crisi]

If you are an independent contractor with no taxes deducted you need to file QTR returns for both the IRS and State if you pay state taxes. If you do not pay at least 90% of your tax burden you will incur penalties + interest when you file at the end of the year. If you write a letter you will most likely get the penalty refunded but the interest you will not... this leads to the investment part as you would love to get the investment % the IRS will charge you. The returns are very easy and they have a calculator to help you estimate make sure to include investment return as well as it is taxable. The same rule applies to large investment returns but it is easier to ask your employer to deduct an extra X dollar amount per pay period if you are an employee that pays tax.

And as someone who is self employed and an accountant, its easy to hire this out and not have a lot of risk. Paying quarterly its easy to "be an idiot" and the IRS isn't forgiving. I use Gusto.

Also, if you are self employed, start yourself an S-Corp and look into a SEP-IRA.

 

[GAN]

My mom started her RMD in 1993. RMDs are calculated on the account holders life expectancy. Back then you could use your presumably younger beneficiary's age to lower your RMD. With that option gave me the option when my mom passed of either cashing in the IRA, or continuing the same RMD she had been taking. So for the past 10 years I have been getting RMD's from her IRA. Now, beneficiaries must withdraw and pay taxes on the entire IRA amount within 10 years.

That’s another thing. Right now I’m 60 and my parents are 87 and 92 -thankfully both still in good health. It’s more than likely that I will be taking RMD’s at the same time I’m taking distributions on my parents 401k. Granted, I’m truly fortunate but it sounds like a lot of figurin’. A Roth would have been so much easier!

 

[tvguy]

That’s another thing. Right now I’m 60 and my parents are 87 and 92 -thankfully both still in good health. It’s more than likely that I will be taking RMD’s at the same time I’m taking distributions on my parents 401k. Granted, I’m truly fortunate but it sounds like a lot of figurin’. A Roth would have been so much easier!

Remember, they changed the law and RMD's don't start until age 72. And you will have 10 years to pull out your parents money after they both have passed.
A Roth would be easier, but I think you'll have more money overall with a traditional IRA.

 

[georgina]

Remember, they changed the law and RMD's don't start until age 72. And you will have 10 years to pull out your parents money after they both have passed.
A Roth would be easier, but I think you'll have more money overall with a traditional IRA.

73, not 72.

Everyone's situation is unique to them. DH will be 70 this year and had a massive 401k which we rolled into an IRA when he retired. We have been converting a portion of it to Roth every year to reduce his taxable income once he has to take RMD's. Too much income will push him into the IRMAA penalty on medicare, which we have accidentally hit once already.

 

[tvguy]

73, not 72.

Everyone's situation is unique to them. DH will be 70 this year and had a massive 401k which we rolled into an IRA when he retired. We have been converting a portion of it to Roth every year to reduce his taxable income once he has to take RMD's. Too much income will push him into the IRMAA penalty on medicare, which we have accidentally hit once already.

Yes, they revised it again to 73. And yes, you have to do your homework and not just assume a Roth is a good option. Not sure how you and I would define "massive" but our IRAs were enough that it would have generated $100,000 in tax liability if we had rolled them into Roths when were were working because of our tax bracket. It is certainly possible that RMD will push my tax brackets in retirement higher, but I just don't think it will push us into the tax bracket we were in working. And that's not even considering the money that $100,000 we would have paid in taxes will have earned over 20+ years.

 

[MrsPete]

I'm not going to get into all the stuff about taxes, Roth, etc., but I'll say this about preparing for retirement:
- No matter how much /how little you earn, set aside something every single month. Make it automatic so you don't have to think about it.
- Set up an emergency fund and don't use it for anything except real emergencies. When we were younger and not so disciplined, we used to keep our emergency fund in a separate bank /no online access ... the point being, we'd have to make a special trip to access that money.
- Buy yourself a moderate house. When your same-aged, same-salaried co-workers "move up" to more expensive houses, stay put. Pay off your house and still stay put.
- Same thing with cars: Buy moderate cars that're cheap-to-keep and drive them until the wheels fall off.
- Cook at home. Pack your lunch. Learn frugal habits such as making two casseroles and freezing one (same effort, saves you from picking up take-out later). These things will really add up over the years.
- Stay out of debt. All types of debt.
- When you're about 10 years out from your anticipated retirement date, study Social Security and decide what's best for you.
- At the same time, don't deny yourself vacations, etc. ... just choose carefully and spend on the things that really matter to you. Be conscious in your splurges.

 

[tvguy]

I'm not going to get into all the stuff about taxes, Roth, etc., but I'll say this about preparing for retirement:
- No matter how much /how little you earn, set aside something every single month. Make it automatic so you don't have to think about it.
- Set up an emergency fund and don't use it for anything except real emergencies. When we were younger and not so disciplined, we used to keep our emergency fund in a separate bank /no online access ... the point being, we'd have to make a special trip to access that money.
- Buy yourself a moderate house. When your same-aged, same-salaried co-workers "move up" to more expensive houses, stay put. Pay off your house and still stay put.
- Same thing with cars: Buy moderate cars that're cheap-to-keep and drive them until the wheels fall off.
- Cook at home. Pack your lunch. Learn frugal habits such as making two casseroles and freezing one (same effort, saves you from picking up take-out later). These things will really add up over the years.
- Stay out of debt. All types of debt.
- When you're about 10 years out from your anticipated retirement date, study Social Security and decide what's best for you.
- At the same time, don't deny yourself vacations, etc. ... just choose carefully and spend on the things that really matter to you. Be conscious in your splurges.

All great advice.

 

[AnnaS]

I'm not going to get into all the stuff about taxes, Roth, etc., but I'll say this about preparing for retirement:
- No matter how much /how little you earn, set aside something every single month. Make it automatic so you don't have to think about it.
- Set up an emergency fund and don't use it for anything except real emergencies. When we were younger and not so disciplined, we used to keep our emergency fund in a separate bank /no online access ... the point being, we'd have to make a special trip to access that money.
- Buy yourself a moderate house. When your same-aged, same-salaried co-workers "move up" to more expensive houses, stay put. Pay off your house and still stay put.
- Same thing with cars: Buy moderate cars that're cheap-to-keep and drive them until the wheels fall off.
- Cook at home. Pack your lunch. Learn frugal habits such as making two casseroles and freezing one (same effort, saves you from picking up take-out later). These things will really add up over the years.
- Stay out of debt. All types of debt.
- When you're about 10 years out from your anticipated retirement date, study Social Security and decide what's best for you.
- At the same time, don't deny yourself vacations, etc. ... just choose carefully and spend on the things that really matter to you. Be conscious in your splurges.

My kinda of thinking!!!