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

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6541

I. Moved everything into Trust, including my house. I’m hoping to avoid probate. I also moved all the separate accounts into fidelity and vanguard. The lawyer who rewrote my Will is a friend, and has known my son most of his life. I left her as Executor. (I know how hard it was to handle my parents’ estates, and don’t think my son or sister are capable, at this time.)

What I haven’t done is to convert to a Roth. My accountant was opposed, but reading this great thread, I don’t know if that was correct.

6542

@DrGoogle ,

The way I see it, the Roth conversion decision is tax-driven. You have to understand your different tax rates when each decision is being made and make projections as to how the scenario will pay out. Again, this is the task for a good Excel-spreadsheet and tax-competent person. The questions I would ask are:

(1) what is the marginal tax rate if conversion is done from tIRA to rIRA

(2) project income from all sources (DI, QDI, LTCG distributions), pensions, SS are various stages of post-work years and then add in your age 70.5+ RMDs: what is your likely effective tax rate then

(3) do you believe you will NEED any of your RMDs or will they be saved and invested (after paying OI tax on them) into taxable accounts

– my ILs did this as a continuation of a lifetime of frugality. Those accounts were then inherited and the new owners got the step-up in basis upon their passing.

(4) do you think that your estate will grow to such a size as to become taxable for Federal and state tax purposes

– you’d have to compare the difference between paying OI tax to convert vs. paying your effective estate tax rate on the taxable part of your estate

(5) do you think you’ll leave the IRA to your kids or grandkids

– might they actually have lower marginal tax rates than you have while taking the RMDs
– if they end up getting the inherited IRA while in their 40s for kids or 20s for grandkids, this is something to consider

(6) if you do “pre-pay” your OI taxes to convert from tIRA to rIRA, then you’ll have a Roth and will not be required to take RMDs for your lifetime or your surviving spouse’s lifetime (if he/she makes it his/her own)

You can see from these questions that it is a personal decision for which one answer will not fit all.

And, then, there is legislative risk that the laws governing IRAs and Roths may change.

6543

In practice, your guy was sort-of right, in that you can rollover your Roth 401k to a Roth IRA and not be subject to RMDs in the rIRA.

6544

It’s been a while since I read up on this, I could be forgetful too, but I thought if you have beneficiaries listed on your account form then you don’t have to worry about probate. Probate happens when there is uncertainty as to who would get the assets.

6545

There are reasons not to convert to Roth, but for people above the Roth threshold in income, the only two justifications for not doing a backdoor Roth IMO are 1) having a large traditional IRA which can’t be reverse rolled into a 401k and 2) having so much money that putting $5500-$6500 per year into a Roth is beneath you. I guess a third reason is that I’ve discovered that many accountants don’t know about it, and don’t want to spend the half hour it takes to read up on it. My accountant of long-standing didn’t know about it (he mostly does business returns and very high income clients).

6546

Also, to add a complication, if your tIRAs contain both pre- and post-tax dollars, you need to have all of your Form 8606s in order to prove up the accumulated basis in your tIRAs when you make withdrawals. The same goes for your heirs.

If you have a $100,000 tIRA, and you have $20,000 in post-tax money, generally:

$20,000/$100,000 = .20 of your RMDs ought to be not taxable as return of basis.
^Double check this with your tax expert. I’m remembering this from reading only.

^The same goes for any RMDs your heirs might be taking after your death. So keep those Form 8606s current and handy.

In our case, I know that my FIL had post-tax IRA monies, but the % compared to the total balances after his death was less than 5%, so I dispensed with this record-keeping nightmare for the beneficiaries’ RMDs and just told everyone to remember to take their RMDs starting in 2015, check their 2015 Form 1099-R and pay OI taxes on the taxable distribution like it’s windfall money, which it is, and think fondly and gratefully of their grandparents.

6547

Can we ask the Social Security Admin to delay our SS benefit distribution even when were are fully retired so that we can have less tax in IRA distribution?

6548

@DrGoogle ,

For any account (retirement or otherwise), if your financial institution allows it, you can implement TOD/POD designations and beneficiary designations. If they are valid on the date of your death, they will rule by way of contract.

Accounts with beneficiary designations (like life insurance proceeds) are generally non-probate assets.

If your designation has not been updated to account for marriage or divorce, for example, the account will go to the person named in your designation (contract) with the institution.

Your will only comes into effect after it’s been probated (filed with the court and declared valid and your executor/executrix duly qualified) for non-probate assets and estate administration matters.

This is not to say that one cannot name “My estate” as the beneficiary or the default IRA beneficiary becomes “your estate” if you mess up the beneficiary designations. That can and does happen, as it did for us in the large Putnam IRA owned by my FIL (he failed to name secondary beneficiaries when he was ill served by his buddy the Putnam broker and did not ever realize he had to fix it).

It is fixable if you have a will, a smart executor and a cooperative and sophisticated IRA custodian. But it costs time and money and the fix is not guaranteed to work.

Housekeep and check all your accounts. Keep things clear and in accordance to your wishes and plan.

Edited to add: if you want to know how your custodian will handle IRA descent and beneficiary designations, read the IRA Agreement (most of the big financial institutions will have theirs online). That is the contract you have agreed to when you opened your IRA there. Discussing how things will be handled is somewhat pointless if one does not know how it works. It’s best work to within the contractual framework that you have agreed to and make sure you don’t try to get too complicated. There is also the avenue of working with an estate lawyer who can do the work for you, but that will also subject you to lesser-competent practitioners who may know even less than you if they aren’t experienced with IRA inheritance.

6549

@coolweather ,

One claims SS benefits, at age 62, 65, 66, 67 or 70 – depending on when you want your benefits, your Full Retirement Age or if you choose to delay to 70 so as to maximize you and your spouse’s maximum monthly benefit.

There is a great deal discussed upthread about the great resources to read and learn about SS claiming strategies.

6550

^ Can I delay/stop the SS claim during the time I withdraw my IRA funds (even when I am beyond 70 and not working)?
I want the get the IRA at low tax rate first then get the SS later.

6551

@coolweather ,

Answer: depending on how old you are and your applicable marginal tax rates.

Your question is unclear. But, I do not believe once you have claimed SS, you can suspend payments.

Most people here have been discussing taking RMDs as late as possible or converting tIRAs to rIRAs after stopping work but before qualifying for pensions (employer pension age) or claiming SS (early, at FRA or delayed). Those years are “lower income” years, when the income will be within lower brackets. Then, you can “take” distributions (because they are technically not RMDs until you are age 70.5) from your tIRA and do whatever you want with them after paying OI taxes on them. That’s when people are considering converting those amounts to rIRA.

@notrichenough , @IxnayBob, please chime in on this discussion if necessary.

6552

@AttorneyMother “I can say that Vanguard and Fidelity were great to deal with. Vanguard was the most accommodating to our unusual and difficult circumstances and helped me get the results I wanted. Janus was OK. Merrill Lynch was essentially represented by the FIL’s former broker rather than the corporate office; he was helpful like a family friend. Putnam was the nightmare company: gave conflicting advice and then disallowed the steps we took according to the last extensive consultation with their representative, then refused to acknowledge its mistake and wouldn’t reverse itself. After significant research, my estate counsel and I managed to take steps to transfer the IRA from Putnam to Vanguard, which then allowed me to take the steps that I wanted.”

We also had the experience from hell with Putnam – this related to a trust that had my MIL and FIL as co-trustees. They would not accept my husband as the successor trustee after FIL died despite the trust documents having specified that and my MIL confirming it. They sent us on wild goose chases after lengthy phone calls, and cost us somewhere over $2K in legal fees, and it was about 14 months before we were able to get the funds out of there. We will never, ever do business with them again. Bank of America was almost as bad, but it took just a few months to get that straightened out. Fidelity was all kinds of awesome.

One observation: It is very hard to get a Medallion Signature Guarantee if you do not have an account with an investment firm that has an office you can visit, or a bank that offers this service. Way more complicated than getting a document notarized.

We’ve got all our IRA’s at Fidelity now with one exception, and this fall we’ll be moving those over. We learned our lesson with MIL – keep it simple and make the lives of those who outlive you easier.

6553

@arabrab ,

Plus 1 from me. I’m glad you chimed in.

Although I’m sure there are others who are pleased with Putnam (it is one of the largest QRP administrators I believe), I am relieved to done with it. Most of the cuss words I uttered in this process was directed at Putnam.

Along with the poor administrative aspects of that financial institution, its funds were front-end load, high-fee funds. FIL was taken in by a broker who was a friend and former colleague when he wanted to rollover his pension lump sum. I’ve told the story somewhere else. High fees, high expenses, poor performance compared to the S&P 500 the entire time the IRA was in existence. Then the fiasco with the beneficiaries. But it got solved in the end with much work. I was happy to help out but it required a great deal of time in research and, ultimately, low-5-figures of legal fees. It helped that FIL had a will so that H could act as executor and get things done. But it could have been completely avoided if it had been attended to beforehand. But it is a difficult topic to broach with elderly parents and may belong more in the estate planning discussion.

6554

As far as I know, that cannot be done, and I don’t know how that would be advantageous if your SS were no longer accumulating credits. Your marginal rate will be <100%, so you will still have more in your pocket from taking SS and RMDs, even if you’re taxed to the max. it would be advantageous if SS would “store” your benefits while you drained your IRA, but I’ve never heard of that.

6555

@coolweather, @IxnayBob,

Ok, I see where the question was headed.

Based on what I understand (which is very limited), the SS benefit does not accumulate more in terms of monthly benefit past age 70. 70 happens to coincide with the year RMDs are required. So, when someone is forced through age and good fortune to delay and collect higher SS payments and take big RMDs, taxes are owed and up to 85% of the SS payment is included in AGI and there is some impact on Medicare rates.

6556

@coolweather, why would you want to do that if you could because when you get to 70, you can have unlimited income and not penalized for social security. Run Turbotax and you will be surprised how little you pay in tax with SS.

6557

^ I thought the IRA distribution tax depends on the total SS distribution and IRA distribution (total income). Am I correct?

6558

@coolweather ,

It is all tax on income. Just different types of income carry different rates.

SS is a bit different because only portions of it is taxable based upon your MAGI from other sources. There is a worksheet to complete to determine the outcome:

http://www.irs.gov/pub/irs-pdf/p915.pdf – see Page 15

It is helpful if you understand what goes into the MAGI calculation that affects how much of your SS (up to 85%) is taxable.

Taxcaster is very useful for this:

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

But it’s really knowing what falls within MAGI that allows one to do tax planning ahead of retirement, if possible.

And, yes, off the top of my head, IRA distributions falls into MAGI, but Roth distributions do not. That’s why people prefer Roths, among other reasons.

6559

^ Thank you.

6560

Family with 2 pensions, 2 social securities, 2 401ks need to do advanced planning, otherwise they will pay a lot of taxes when they retire.