How much do YOU think YOU need to retire? ...and at what age will you (and spouse) retire? (Part 1)

[IxnayBob]

Someone upstream asked how many legs were on our retirement stools. I’m like a busy squirrel, burying nuts all over the place. Apparently, squirrels often forget where they’ve buried their nuts, and I’m sure I probably will also. Taxable, 401k, Roth IRA, tIRA, pensions, SS, maybe eventually a SPIA.

[dstark]

We have roth experts here. I do not have a roth.

If I convert some of my traditional tira to a roth…

If I die before I am 70 and my wife inherits the roth…does she have mandatory withdrawals?

If both my wife and I die and my kids inherit the roth, when do mandatory withdrawals start for the kids?

[AttorneyMother]

@dstark‌

Please double check, but this is my general understanding:

(1) spouse inherits Roth IRA: can treat it as her own, i.e., no mandatory distributions

(2) non-spouse inherits Roth IRA: must distribute balance in 5 years

http://fairmark.com/retirement/roth-accounts/roth-distributions/inherited-roth-ira/

Here’s the IRS page on Roth distributions:

http://www.irs.gov/publications/p590b/ch02.html#en_US_2014_publink1000231079

This part bothers me:

If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. See When Can You Withdraw or Use Assets? in chapter 1.

This language suggests that if Roth IRA owner dies before 70.5, spouse-beneficiary has mandatory withdrawals. I have to read further.

[dstark]

AttorneyMother, thanks.

[AttorneyMother]

From IRS Pub 590-B - Spouse-beneficiary of Roth:

If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own.

Why wouldn’t the spouse-beneficiary not ever want to “treat the Roth IRA as his or her own”? That would allow the original Roth IRA benefits to accrue to the spouse-beneficiary, i.e., no RMD.

[notrichenough]

I took means-testing as “if you make $x, no SS for you.”

Well, that’s a pretty extreme cliff.

What it really is, is “if you make $x, you lose y% of your SS. if you make $x+1000, you lose (y+)% of your SS”, where y reflects what percentage of the benefit is taxable and what your incremental tax rate is, and increase if you have more income. Right now the maximum loss of benefit is about 33% (85% at an incremental rate of 39.6%). I hope it doesn’t go any higher…

More challenging would be asset-testing, unless it is restricted to something easily measurable like retirement and brokerage accounts and cash. I’m not sure we will ever see this.

[IxnayBob]

^ some states tax SS also.

[AttorneyMother]

Everyone, move to a non-income tax state.

Seriously, it’s a consideration. Between state income and estate taxes, all this planning work can be undone if that is not taken into account.

[shawbridge]

@AttorneyMother, are there non-income tax states other than Florida that are warm during the winter?

I had a friend who was thinking of forcing his brother to sell the family company that they had inherited from the father. The brother ran it for his own benefit (the company chartered private planes to take the firm basketball team to tournaments as a corporate expense – the brother played basketball) and paid essentially no dividends. I gave him advice on how to force his brother to either sell the company or buy him out but told him his brother would hate him for life (the brother would never understand that he was being unethical). It worked (both forcing the buy-out and the hatred). I advised him to move to Florida and avoid a 5.95% tax. He didn’t sold his interest, paid the tax, and then moved to Florida because he didn’t have to work anymore.

Re Stanley and the Millionaire Next Door, I loved that book. Way back in the dark ages (post #4757), I posted:

There is a pop business book called The Millionaire Next Door, that while breathlessly telling you in each chapter that it is going to give the secret to life in the next chapter, there were three key insights of the book:

1. The people who accumulate wealth are not necessarily people with high incomes but people who spend less than they make (who often turn out to be small entrepreneurs like dry cleaners, etc.) like @mcat2's co-worker;
2. Your spending is highly influenced by the folks around you. For example, people tend to adjust their spending to their neighborhood. If someone buys a house in an affluent town to get the good public schools and if his/her neighbors have gardeners come in once a week to mow and landscape and then replace their cars fairly regularly, he/she is likely to do that also without thinking consciously as that level of spending seems normal;
3. If you subsidize adult children's lifestyles, they will never learn to save because they never have to adjust spending to match income.

As I mentioned in the post, it shaped some of my spending habits though I got a bit more granular in identfying about the key choices one makes that affect one’s level of spending.

[AttorneyMother]

@Shawbridge‌

Texas, for one. Although the winters have been getting a bit colder in the past few years. The summers are a different story.

[AttorneyMother]

@dstark‌

http://www.marketwatch.com/story/i-inherited-a-roth-ira-now-what-2013-06-28

Editor’s note: Dan Moisand answers reader questions on all things retirement every Friday. If you have a question for Dan, please email him at RetireQA@marketwatch.com.

When you inherit retirement plans, the rules for how those funds are taxed and the options available to the beneficiary vary based on the type of account and whether the beneficiary is a spouse or not.

Today I explain to a non-spouse beneficiary some of the rules that apply to inheriting a Roth IRA. I also answer a reader question about one way to increase her Social Security payments even though she started taking benefits early at a reduced rate.

Q. My Dad is 74, and he has a ROTH IRA as well as a 401(k). When he passes away, my mom will inherit the retirement accounts, and then we his sons will. My question is can I, as a non spouse beneficiary, rollover the ROTH IRA into my personal ROTH IRA? — C.B.

A. No you cannot roll the Roth IRA money into your personal Roth IRA. Only spouses may do that. If your mother rolls the Roth IRA into her own Roth IRA, it is treated as though she had always been the owner of those funds, so those funds will continue to be exempt from Required Minimum Distributions (RMD), an attractive feature of Roth IRA’s. Also, she would name the beneficiaries. It is important to check that the beneficiary designations on all accounts match the wishes of the current account owners.

The beneficiary designation trumps anything written in one’s will or trust agreements. I saw a case in which the wife had a small IRA that named her church as primary beneficiary. When her husband died, she rolled his account into her IRA but did not change her beneficiary designation. When she passed away, the church was entitled to all of the funds. This was an unpleasant surprise to the beneficiaries.

You have two basic options as a non-spouse inheritor; take a lump sum or, transfer the funds into an account titled as an “inherited Roth IRA.” Taking the lump sum is pretty simple. The lump sum you receive is not subject to tax. Once you get your check, if you wish to invest any part of it, it will be taxed just like funds in any other non-retirement account.

Most inheritors with an eye on the long term prefer to rollover the money to an inherited Roth IRA. The assets continue to grow untaxed, you can choose your own beneficiaries and withdrawals are tax free.

You cannot, however, let all the account just sit in the inherited Roth IRA. By Dec. 31 of the year after the year in which the owner died, you must have begun taking required minimum distributions (RMD) annually. If you don’t make the RMD by that deadline, you will need to have withdrawn all the assets by the end of the fifth year after the year of death.

The RMD you will be subject to is based upon the IRS’s single life expectancy table. The value of the account on Dec. 31 of the year death is divided by the beneficiary’s life expectancy listed on that table to obtain the first RMD amount. For example, if you are 55 at the time, the table says your life expectancy is 29.6, you would divide the Dec. 31 value by 29.6. In the following year, you use the following Dec. 31 value and divide by one less year (28.6). The next year, use the value as of the next Dec. 31 and 27.6.

You mentioned you had brothers. There is one more step to consider. If your mom lists more than one person as beneficiary, you should have the shares of the account separated into individual inherited Roth IRAs by Dec. 31 of the year following the year of death. This enables each beneficiary to use their own life expectancy. Otherwise, distributions are calculated based upon the oldest beneficiary’s age causing distributions to occur faster than necessary.

This can be particularly important with non-Roth retirement money like a 401(k) in which distributions are taxable. Generally, beneficiaries wish to have the smallest RMD’s possible in order to control taxation better. A beneficiary can always take more than the RMD but the lower the minimum, the more flexibility in tax planning.

Again, make sure all the beneficiary designations on all accounts reflect the owner’s wishes. It should be noted that the rules are different if any of the beneficiaries are beneficiaries through a trust that is named as beneficiary of a retirement account. Naming a trust can be helpful but if not done correctly, can result in an acceleration of taxation.

Also, to accommodate an account holder’s specific wishes, many attorneys prepare customized beneficiary designations. Not all 401(k) plans will accept customized beneficiary designations so many will roll those funds into a traditional IRA.

[AttorneyMother]

We were just in FL (Miami and Boca Raton area) this past December. It looked like everyone from the NE had the same idea of moving there to escape estate taxation. It’s my sense that, for them, one estate planning move may be to relocate to FL and the NE states seem to (finally) be making note of that.

[shawbridge]

I am looking for a place to live during the winters (as opposed to summers). I proposed Houston (I have work there) and Austin (I have an employee there and one of my first job offers was at UT). We have to go visit. If the kids both end up in CA, we will probably go there for winters. But, having a different residence over the last couple of years, which were very good years for me, could have saved me as I have paid a lot in 5.25% income.

Oh and someone asked about Canada. My wife is a dual Canadian/US citizen (born and raised in Canada). As a consequence, we could move to Canada and with little issue (other than in Quebec), I can structure my affairs so as to qualify for medical care. Alas, I think it would screw up the trust structure.

[Iglooo]

We can’t close loopholes because closing loopholes are tax increases. Once a loophole, always a loophole.

From what I understand, this is not true. The president can use executive order to close loop holes, or any practice that was not the intention of the law. Apparenly, taxing carried interest as ordinary income is also possible with a stroke of a pen. There were a few other tax correction the president cxan make on his own. I’ll see if I can find the link to the article that listed them all.

[AttorneyMother]

Austin is wonderful, but has been suffering growth and its attendant ills. COLA is getting high, but nothing like the NE
The hill country around Austin is great and offers many outdoor options. Austin would be my first choice in TX.

Houston is enormous and has to be examined carefully for pockets of livability. High humidity.

Check out DFW also.

The TX coast is limited so FL trumps that.

[notrichenough]

There are seven states with no income tax of any kind: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming

There are two more with no income tax but that tax interest and dividends: New Hampshire, Tennessee

There are 3 states with no tax on pensions or SS: Alabama, Mississippi, Pennsylvania

[AttorneyMother]

I’m not a legislative expert. But the question lies in whether the provision is within a statute (Congress has to get involved), or an administrative rule that the agency (IRS) within the executive branch can change.

[Iglooo]

How did the backdoor came about? Didn’t Bush just do it using exec order in 2010? Even if he had to go through the Congress, it may be remedied for being used not intended by law. Let me look for the article. There were quite a few the president could take a unilarteral action on.

shawbridge, I didn’t mean to pry into your affairs. I was just making a genaral comment that a dynasty trust becomes useful when net asset exceed a certain threshold. It tends to be pretty high, high enough to put up with complexity and inflexibility.

[AttorneyMother]

I want to correct something I posted above:

Please double check, but this is my general understanding:

(1) spouse inherits Roth IRA: can treat it as her own, i.e., no mandatory distributions

(2) non-spouse inherits Roth IRA: must distribute balance in 5 years

That should be:

(2) non-spouse inherits Roth IRA: there is a choice

(a) receive the entire balance of Roth IRA by 12/31 of the fifth year after Roth owner’s death OR
(b) receive distributions over new owner’s life expectancy if death occurs before RBD of 70.5

In other words, please check with your accountant or FA.

[cbreeze]

shawbridge, I didn’t mean to pry into your affairs. I was just making a genaral comment that a dynasty trust becomes useful when net asset exceed a certain threshold. It tends to be pretty high, high enough to put up with complexity and inflexibility

I agree, especially when your children are still single. There will be a lot of revisions involved in the future.