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

[Iglooo]

I do not know what happens when an investor buys munis or funds in a different state than they live in and what the tax ramifications are. You may be subject to state income taxes.

You owe your state tax on income earned from another state munis. We used to own FL munis for some reason and had to pay our state income tax on the interest earnings. Talking about making tax returns complicated. This is where Roth comes in handy. If you have to buy munis to lower the tax, you should hold regular bonds in roth that pay better rate. JMO

[momsquad]

@AttorneyMother: If you have a Schwab account you can choose from thousands of individual bonds, munis included, using their bond screening tool- no broker involved. I like owning individual bonds because I like to know that at least the principal will be secure (except with Stockton, San Bernardino and Detroit munis). Bond funds should mirror yields of individual bonds but you run the risk of the share value dropping.

[momsquad]

Found this great summary of bond funds vs. individual bonds. I see that my preference for individual bonds is based upon a misconception of risk that is perpetuated by the likes of Suze Orman; ugh.
http://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

[dstark]

What was your misconception of risk, momsquad?

[Iglooo]

momsquad, thank you for the link. It’s not just Suze Orman, Bill Berstein also recommended individual bonds in his book. I think picking individual bonds is even trickier than stocks. Maybe not for munis.

[Madison85]

If you live in Wisconsin, you might also owe state income tax on your own state’s bonds.

[momsquad]

dstark, If I understand correctly, the risk is in not reinvesting the bond interest adequately:

According to Fabozzi in the Handbook of Fixed Income Securities, 1991, p97: “In high interest rate environments, the interest-on-interest component for long-term bonds may be as high as 70 percent of the bond’s potential total dollar return.” Therefore, focusing on the principal as “safe” misses the point, since it is in many circumstances the smallest component of a bond’s return. If you are saving for a large goal, you therefore have to invest considerably more into the bond than you want guaranteed to ensure the need is met by the principal.

We are not in a “high interest rate environment” now though, so perhaps this is not such a concern. I think bond purchases are one area where a good broker can be very helpful, as it is difficult to keep up on new offerings.

[dstark]

I agree. A bond broker can be very helpful on new offerings.

[AttorneyMother]

@momsquad‌

Thank you for the information about Schwab. My H’s group’s plan is with Schwab but other than that, we have no accounts there. I’ll have to see about individual bonds though I think I’m going to be better off with a bond fund so that I can park money and check yearly but interest rate fluctuation is a problem with bond funds along with the fund expenses, as you and dstark pointed out.

[AttorneyMother]

Quick share: for those (like me) who know virtually nothing about Medicare and its various component “parts,” here is a quick tutorial. This is from August 2013:

http://www.ebri.org/pdf/publications/facts/0813fact.pdf

[AttorneyMother]

@momsquad‌, thanks for reposting my Roth work-in-progress. I’ve added some clarifications.

@IxnayBob‌, please check my summary of IRS Notice 2014-54

THE ROTH POST:

NOTE: A “qualified” withdrawal from a Roth is a “defined term” and generally means a withdrawal that (1) meets the 5-year holding period (including those triggered by each conversion of tIRA to rIRA) and (2) is made after a “triggering event” (most applicable of which are: age > 59.5, disability or death)

(1) “Qualified” withdrawals from a Roth IRA by the owner:

– no RMDs ever while owner is alive = tax free growth during life of owner = good way to pass on assets to spouse or heirs (not considering estate taxes here)
– “qualified” withdrawals ARE NOT included in recipient’s “gross income” = free from Federal taxation, meaning that Roths:

(a) do not count as taxable income against SS
(b) do not incur the 3.8% Medicare surcharge on net investment income
© do not count as income that may subject taxpayer’s qualified dividends and capital gains to the AMT because Roth withdrawals do not count in AGI

(2) “Qualified” withdrawals from the Roth by surviving spouse of owner have the same benefits because surviving spouse can make the Roth his/her own and have all of the benefits in (1) above

(3) Transfer of ownership of a Roth to non-spouse heirs: because the balance of the Roth is post-income tax, the Roth owner is essentially pre-paying the taxes on all conversions from tIRAs to rIRAs and “gifting” those pre-payments of income taxes to the non-spouse heirs (without those payments being deemed “taxable gifts” and incurring gift taxes). By doing so, the Roth owner is also reducing the size of his taxable estate.

(4) Saving during retirement: You can make contributions to a Roth if you continue to work in retirement as long as you stay within the income limits. Traditional IRAs do not allow contributions after age 70 ½.

Contributions to Roth 401(k) v. rIRA:

(1) Eligibility to contribute annually to rIRA (not a conversion) is limited by income ceiling

(2) Eligibility to contribute annually to Roth 401(k) (if your employer plan offers a “Designated Roth Account” or “DRAC”) is NOT limited by income ceiling but participant is constrained by terms of employer plan

(3) Roth 401(k) has RMDs requirements similar to those of a 401(k) plan whereas rIRA DOES NOT. The general advice is that the owner of a DRAC account approaching 70.5 should consider rolling his DRAC to rIRA to avoid “lifetime” RMDs

(4) Since 2012: an employer plan that has a DRAC can allow employee to transfer any amount from traditional plan accounts to DRAC in same plan EVEN IF such amount could not legally be distributed to employee at time of transfer
– this vastly expands number of people eligible for Roth conversions by adding all still-employed people under 59.5 (they do not have alternative of converting to rIRA because they can’t get money out of 401k plan prior to age 59.5 unless they quit their jobs)

Applicability of IRS Notice 2014-54:

– IRS permits the partitioning of Roth 401(k) account and traditional 401(k) account funds in one rollover transaction
– owner can ask funds from Roth 401k account be rolled over directly to rIRA AND funds from 401k account to be rolled over directly to tIRA --> results in two accounts: one rIRA and one tIRA

[IxnayBob]

@AttorneyMother,
I “borrowed” this from
http://www.marketwatch.com/story/how-to-benefit-from-new-irs-ruling-on-roth-ira-conversions-2014-10-22

The IRS took notice of these “inventive” efforts and recently issued IRS Notice 2014-54, providing taxpayers with the ability to specially allocate after-tax contributions directly to a Roth IRA. The conversion of after-tax contributions to a Roth IRA doesn’t create any tax liability, since tax was previously paid on the amounts contributed.

Allocating after-tax contributions is only possible when the entire account (including both pretax and after-tax amounts) is rolled over. If only part of it is rolled over, the pro rata rules still apply. The IRS notice is also only applicable to after-tax contributions to employer plans; it doesn’t apply to IRAs.

It isn’t stated above, but there are three types of assets in this kind of 401k: post-tax contributions, pre-tax contributions, and earnings/growth of contributions. The post-tax contributions go to rIRA, everything else to tIRA.

Small point, but as I understand it, it is actually two transactions that are materially simultaneous and are considered “twinned.”

[IxnayBob]

… and, the Mega Backdoor Roth comes into play because of this:

In 2014, employee contributions are limited to $17,500 plus $5,500 if over age 50. However, depending on the structure of the plan, employees may be able to make after-tax contributions in excess of these limits. Ultimately, the total of all employee contributions (pretax, Roth, and after-tax) plus employer contributions (match, profit-sharing, etc.) cannot exceed $52,000.

The amounts have since gone up slightly, but the basic idea remains.

[AttorneyMother]

This article was written by the CFP/MD who wrote the CNBC article about retirement medical costs a few pages back. Though it’s addressed to the FP community, here she addresses some common-sense considerations about planning for long-term care without insurance:

http://www.financial-planning.com/blogs/create-a-long-term-care-plan-without-insurance-2692251-1.html?zkPrintable=1&nopagination=1

I especially appreciate that she mentioned “The Perils of Too Much Stuff.” I’m working on whittling down stuff now and it’s a good feeling and, though it’s still hard to let some things go, it’s better to let things go when they still have a useful life. (If only new technology does not keep prompting H to have to upgrade things, then I’d be even happier.)

[sax]

Two thoughts as I am reading your discussions

We are looking into life insurance policies written so that they can be used for long term care. For some people these might be beneficial. See below

http://longtermcare.gov/costs-how-to-pay/using-life-insurance-to-pay-for-long-term-care/

Re: social security,file and suspend and medicare.

With the change to full retirement age (age 66 etc) it is important to pay your medicare out of pocket (if you have filed and suspended) so that the govt does not consider you waving your SS file and suspend so that they can deduct the medicare from it. See #29 below

http://www.pbs.org/newshour/making-sense/social-security-secrets-you-ne/

So many gotchas…

8 more work hours til the Sax family retires WooHooooooo
Holy Moley

[AttorneyMother]

@‌sax

Congratulations! You must be beyond thrilled. Best wishes for a smooth transition to retirement!

And thank you for adding your thoughts about SS and LTC funding. Keep them coming.

[sax]

Thrilled with a little bit of panicked actually, hahahha. Thanks AM. and especially thanks for all your great info. This thread is so immensely informative.

[notrichenough]

8 more work hours til the Sax family retires WooHooooooo

Nice! Good luck!

[hayden]

Congratulations, and all the very best, sax!

[AttorneyMother]

@sax

Thanks for the kind words.

If you aren’t out enjoying retirement too much, please come back and add your experiences with LTCi and funding and filing for and suspending SS. It’s always best to learn from the experience of others.