I read an article about how the Secure Act is making it easier to buy/hold annuities in a retirement account. It’s obvious what constituency advocated for that change. I didn’t know the age for RMD’s has been changed from 70.5 to 72. Why on earth did they do that? All it does for the govt is push tax revenue into the future. This is a big change for me, because turning 67 this year and I am at least going to do a cost/benefit analysis of moving to a 0% state tax state (like Florida) before reaching RMD age. So now I don’t have to worry about it for a couple more years.
With 20/20 hindsight I would have less money in a traditional IRA and more money in a regular brokerage account invested in stocks. It bugs me that my IRA converts long term capital gains into ordinary income while my brokerage account stocks can give me very low, or even zero federal tax income (qualified dividends and long term capital gains) if I manage income properly.
The 70.5 age was based on life expectancies of the early 60’s and hadn’t been updated since.
The act was made revenue-neutral by limiting stretch IRAs to only 10 years.
Hindsight is great, but all you can do is make the best choice at the time. If capital gains rates are raised significantly in the future, this may not have been a better approach.
We were in a 40% bracket for many years due to the AMT phaseout bucket, I’ll take saving 40% now over potential LTCG later.
You could do some asset allocation to put things like bonds and high turnover (short term capital gain) mutual funds in the retirement accounts while having index funds and buy-and-hold stocks in regular accounts.
When articles are published documenting the average needed for retirement, for example, are they assuming for a couple, or for each person? It is usually not specified, as far as I can tell.
Has anyone else tracked how much they really spend each year, “all-in?” I did it for 2019, and it is a scary number. There were some big expenses, such as paying for a special trip, more vacations than normal, and close to $20K for house remodeling (that didn’t go far, btw).
When I tried to estimate expenses, the number I came up with was significantly lower than actual expenses.
I plan to do this again for 2020, and I’m hopeful the number will be lower, but I want to be aware of actual expenses when I retire.
Has anyone else tracked how much they really spend each year, “all-in?”
Yes, monthly for about 8 years, ever since a financial planner mention a number that seemed way high (but was not so far off). I do it at a high level “outflow” - cash+checks+ withdrawals (incl autopays & Visa). I omitted from totals our college payments (done now - yay) and 2013 car purchase (in cash; we’ll do per month pro-rating estimate). Annually we study the Visa full-year report, breakdowns by category.
And Yes… scary. Glad though to have a realistic number for retirement planning. To be honest, with kids now gone there is not much we want to cut back on (though could if needed)… oh, other than the one area of progress… we paid off the mortgage in 2019.
Note: If you do this, you likely will also need to have an adder for medical unless you have a great retirement plan that still includes medical.
Am I correct in inferring the new rules make Roth conversions less attractive if one’s intent were to gift to kids? I’ve never done a Roth conversion. I assume that I would be in a high tax bracket in early years in which I have to take RMDs. So the only question would be if I were in a lower tax bracket before then.
Since we are retired, I know exactly how much we spend because we pull it out of our portfolio. I also have a good handle on how much we’d have to live on for necessities if we decided to cut back on any extra for some reason. What we spend now has some extras with room for reduction.
Household maintenance can be hard to estimate. We’re in a 21 year old house and we are at that stage where we’ve been spending some $$ the past few years - new HVAC system, new well pump, interior and exterior painting. For 2020, new roof and replacing carpeting or switching it to hardwood floors are on the list.
Hmmm…I thought this would make Roths more attractive.
Thinking out loud here…Are you asking would you be better gifting $$ today or converting an equal amount of your tIRA to Roth? If you convert to Roth and pay the taxes on the conversion, wouldn’t that ‘cost’ the same as gifting after-tax income to your children? (If you are contemplating appreciated securities, that is beyond my pay grade.)
The investment returns on the Roth would never be taxed, so even though your children would need to withdraw all of the funds within ten years of your death, they would not pay taxes on the contribution or the earnings. The distributions will not push them into higher marginal tax brackets or eliminate any tax breaks to which they might otherwise have been entitled. Some of this may not matter depending on your children’s income level at the time of the inheritance.
Inheriting a tIRA becomes less attractive b/c the beneficiary will be forced to take the RMDs within ten years at a time that may be their peak earnings years, or when applying for FA for college and not desiring an income bump.
Minor point- there are no longer any RMDs on an inherited IRA of any type. You just have to withdraw it all within 10 years.
You can time it any way you like.
IIRC, IRA distributions are counted as income for FA purposes, even if they come from a Roth. So the 10 year limit can really mess up someone’s chances for need based aid in a number of ways.
Yes. It is actually not that hard. If all of your bills are ultimately made from a specific account (e.g. the checking account that you pay credit cards, mortgage/rent, other bills, etc. from), then just total up the money moved into that account over the year. Adjust for any significant difference in balance at the beginning and end of the year. Then remove income tax payments or refunds, since those are based on income (and should be accounted for in your net income after income taxes), not spending. The result should be total spending for the year.
From your total spending in the year, you can subtract large irregular spending to get your baseline spending level. Of course, you need to add up your irregular spending over a decade or so to get an idea of how much irregular spending costs per year on average (as opposed to one year having unusually high or low irregular costs).
If your baseline spending level is higher than you like it to be, then it can be more work to break it down further to find places where spending is excessive relative to the value you get from it.
For irregular spending, you can choose to do these items less often or less expensively – the exception often being medical expenses, particularly surprise bills for services purchased under duress without being fully informed of costs or being able to shop around (e.g. emergency or urgent care).
If your baseline spending is estimated based on what you spend while employed, remember to subtract costs like commuting and other work-related costs, and add costs of employee benefits that you used (medical insurance being a large one for many people) as well as costs of activities you plan to do in retirement in order to get an estimate of baseline spending in retirement.
Yes…I stated that correctly in my second paragraph: ‘your children would need to withdraw all of the funds within ten years of your death,’ but then lapsed and referenced RMDs in my third paragraph.
I don’t know enough about FA to know if Roth distributions are considered income. I didn’t even realize they would be reported anywhere.
Not a problem here for us. It is called a retirement account for a good reason. We plan to leave as little as possible for our future heirs (a reminder to all: a living person has no heirs, heirs arise after one bites the dust - see https://www.law.cornell.edu/wex/heir).
When estimating expenses, consider that some tasks you do for yourself now might need to be farmed out as one ages - lawn care, mulching, stuff that requires climbing on ladders, snow removal, etc.
This topic was discussed earlier in this thread. I have been tracking every penny in and every penny out monthly for the past 20 years. It made retirement planning easy. We’ve been retired now for two years, zero surprises.
Regardless of whether traditional or Roth is better for you is complicated. Less complicated, imo, are the benefits of a trust. All of our accounts will go to our future heirs through trusts.
Insufficiently caffeinated. Please remove “Regardless of” in first sentence above. SECURE Act signing has made us appreciate that choosing a trust as a vehicle allows some control to remain for kids’ timing of distributions.
I am doing Roth conversions at a moderate pace, and wife is contributing to Roth 401k, even at the highest tax brackets.
It is called a retirement account for a good reason. We plan to leave as little as possible for our future heirs (a reminder to all: a living person has no heirs, heirs arise after one bites the dust - see