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tax favorable withdrawal strategies retirement vs legacy

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  • tax favorable withdrawal strategies retirement vs legacy

    is there a blog post or can someone comment on the following issues, which i may have (read probably) misunderstood

    one option after retirement to cover expenses is to draw off roth ira.  this is done in part to help keep tax burden lower.  at some point we may be lucky enough to reach age 70 and have rmd's kick in from retirement accounts and we can lay off roth ira's if sufficient funds are generated.

    however, many of us plan to leave significant inheritances to kids.  it seems like roth ira is a powerful tool for transmitting wealth generationally.  that makes me less inclined to tap into roth ira to keep taxes down and continue to let the rules for roth ira and time and compound interest leave a larger legacy.  or is that stupid?  i realize these are first world problems.  i'm just looking for smarter and more experienced people who have already thought this through.

    i did read POF post on taxman leaveth.  fascinating.  my accountant assures me it is impossible for me to achieve that kind of tax efficiency due to desire to keep working and pensions and stuff.  yes i realize it's a good problem to have.

     

  • #2
    I think when you read of people using roth money after retirement it is primarily to avoid paying ordinary income tax on tax-deferred money.  At 70.5 of course taking tax deferred money is impossible to avoid.  Using roth money can be avoided by having enough money in a taxable account to bridge you from retirement to 70.5.

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    • #3
      Some of this hinges on how long you are going to live, which can be difficult to know.

      If all your money is in 401k/IRAs, then not much is possible.

      Consider moving your IRAs to a taxable fund instead of Roth converting. Gives you the options of gifting and step-up basis at death. I don't see Roth conversion as great deal. Doubt Congress is going to let the "stretch IRA" continue for long.

      If passing on your wealth is your goal, consider sale-leaseback arrangements. Personally, I am not interested in handing my kids a lot of money when I die.

      http://mutualfunds.com/expert-analysis/on-tax-efficient-withdrawal-strategies/

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      • #4
        From your description of the 'issue' I have heard of a similar retirement withdraw strategy.   As I recall the basis of the particular strategy was more about deferring two income streams until Age 70; a. the tax-deferred income stream that has hopefully built additional value and b. the delay of using Social Security until age 70.  Delaying use of social security in turn increases the payment stream the government provides when you do start using it and is a fairly substantial increase if you delay for the full eight years (from 62 to 70).

        I have seen a variation of POF's retirement withdraw strategy also, with about 4k of taxes for $120k of income.  Basically withdrawing 40k from taxable, non-taxable, and tax-deferred accounts retirement accounts.  There were two implications for me in this approach; a. at a 4% withdraw rate in retirement, you need a million in each bucket.  Getting to a million in tax deferred needs time and steady contributions, taxable, highly unlikely to get to a million given family income, and non-taxable of a million would require both consistent contributions and conversions of tax-deferred.

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        • #5
          We focus on building Roth IRA portfolios specifically for those two reasons:

          • Leave a tax-free legacy to your spouse and children, and

          • Flexibility in retirement


          Taxable IRAs are better left to charity, if you are so inclined, so that those who actually pay taxes get a break. Considering that it's very likely your children will be in a higher tax bracket that you are during your later retirement years, this is a great strategy.

          Note that your children will be required to take distributions from the Roth and cannot keep it intact to pass to the next generation.

          As I mentioned in another thread, our general goal for retirement is 1/3 of value in after-tax (called taxable, but I think that's a misnomer), Roth, and taxable TIRA. And I do not agree that it is impossible to achieve that kind of tax efficiency with proper tax planning and strategic Roth IRA conversions over your lifetime. As always (imo) financial planning and experienced CPA advice can help you achieve these goals. (Please be assured that I'm not implying your are not getting good advice, btw, as I have no idea of the specifics of your situation and relationship.)

          When and How to Convert to Roth IRAs
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            I plan to spend from taxable before draining a Roth account, but I might start to think about it differently if I know I'll end up giving the money to my children or charity.

            Taxable money sees a significant upgrade of sorts when passed along. To kids -> stepped up in cost basis. To charity -> no capital gains taxes. Whereas Roth money is already "upgraded" and can't really get any better. It might actually make sense to spend from Roth rather than sell shares from taxable, especially if you're dangerously close to crossing into a higher tax bracket and having to pay taxes on qualified dividends and LTCG. Food for thought.

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            • #7
              Don't completely rule out taking withdrawals from your IRAs before you are forced to with RMDs.  You need to be careful not to roll up to another tax bracket when you do it though.  Done properly you can stay at a lower tax rate immediately while also reducing future taxes you pay.  Some of the most effective strategies result in pulling from multiple sources to keep taxes lower over the long term thereby increasing the longevity of the portfolio. Personally, I use a software program that analyzes the whole financial picture and creates distribution plans for my clients.

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              • #8
                @q-school - Yes, this is the power of the Roth IRA and its importance in this group with high retirement wealth folk who probably will leave a good amount to their next generation.  The current Death tax exemption is $5M per person.

                Yes, Trump's new plan is there to eliminate that, but I believe that's a bargaining chip for him since it completely flies in the face of his base to bolster the middle class ($5M is NOT middle class no matter how we feel about it).

                So if your net worth remains over $5M at time of death to the next generation, the Fed will be first in line to help themselves to your hard earned dollars --- unless it sits in a Roth -- Tax free, (yes RMDs based on the receiver's lifespan, not you).   A LLC structured properly will also accomplish this and a conduit with those with high worth real estate properties.

                So for those with high wealth or hate the tax man, Roth has some nice properties of generational wealth preservation.

                 

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                • #9
                  A Roth is one of the best retirement accounts to inherit and a tax-deferred IRA is one of the worst.  Thus, better to spend down the IRA in the most tax-efficient way possible during your life, if you are able, while preserving your roth and other post-tax assets.

                  In theory the step up in basis could go away if the new plan to eliminate the estate and generation-skipping transfer tax happens.  This is still unclear, and time will tell.  In that event, a Roth may be superior to a regular post-tax account as well.

                  Every problem in the first world is a first world problem.  And event the second and third world has to pay taxes.

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                  • #10
                    so i guess a follow up is for those with the means and intent to inherit money to kids, does it make sense after 59 1/2 to transfer aggressively the 401 into the roth IRA in retirement?

                    try not to trigger the next tax bracket, if that's a possibility, and pay the taxes for the inheritability advantages.  how do i know if that's better than taking the money and investing it so the kids get a step up basis on the taxable?

                    interestingly a quick google search shows you can convert 457 plans to roth ira.

                    thanks

                    sorry for stupid questions.  all these questions about trusts make me rethink a few things.  also i'm finally forced to admit i'm not the poorest kid on the block after decades of denial.

                     

                     

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                    • #11


                      interestingly a quick google search shows you can convert 457 plans to roth ira.
                      Click to expand...


                      Only if it's a governmental plan. Then, you can rollover to IRA and convert to Roth IRA. Non-governmental 457(b) plans cannot be rolled over.

                      Once you're retired (whether it's 49 1/2, 59 1/2 or whatever age), it may very well be a good idea to do Roth conversions up to the top of your income tax bracket (and maybe even the next one), particularly if you're looking at a likely RMD problem. Tax gain harvesting up to the top of the 15% bracket may also be an option.

                       

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                      • #12
                        If passing the most money to your children is the goal, you want to minimize the taxes paid, whether they be paid by you during your life, or by your children after your death (and also by your estate, if you end up having a taxable estate, but that's another discussion).

                        If you're my parent, and you've got a $1M IRA, and you pay 40% income tax, and I'm your kid and I pay at a 25% marginal rate, I'd rather you just leave me the $1M IRA and I'll pay the $250k tax, netting me $750k.  If you burn up $400k on tax making roth conversions, I'm going to net only $600k.

                        But this involves a lot of future-predicting, what bracket do you foresee your kids being in when you die, what the rules will be on the transfer of these accounts when you die, how will your children elect to handle these accounts, etc.  A lot can change between now and then.  If you can do a lot of low-tax conversions then it lowers this risk, but it's going to be difficult to plan perfectly.

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                        • #13
                          Hard to know what bracket a seven year old will be in someday. Right now he can't even wear matching socks.

                          So the waters are murky.

                          Alright I feel better just sticking my head back in the sand and pretending to be poor again. I guess I will just do what I always do--- tell my wife to stop spending. That strategy has served us well for decades.

                          Thanks.

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                          • #14
                            Try this:

                            https://www.i-orp.com/gamma/index.html

                            Generally, I like the idea of doing a Roth conversion up to the standard deduction/exemption amount and then living off dividends/CG from taxable up to the 15% tax bracket, with any remaining from Roth funds.  $0 tax with that strategy.  But chances are you won't be able to pull enough down from your 401k with that strategy which is why it gets a little tricky and why the above website helps.

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                            • #15




                              so i guess a follow up is for those with the means and intent to inherit money to kids, does it make sense after 59 1/2 to transfer aggressively the 401 into the roth IRA in retirement?

                              try not to trigger the next tax bracket, if that’s a possibility, and pay the taxes for the inheritability advantages.  how do i know if that’s better than taking the money and investing it so the kids get a step up basis on the taxable?

                              interestingly a quick google search shows you can convert 457 plans to roth ira.

                              thanks

                              sorry for stupid questions.  all these questions about trusts make me rethink a few things.  also i’m finally forced to admit i’m not the poorest kid on the block after decades of denial.

                               

                               
                              Click to expand...


                              This kind of decision-making requires intrafamily wealth planning/consultation.The answer will depend on many factors and will be different in each situation.

                              In my situation my parents were never in anything but the highest federal tax bracket, plus state. Even in retirement. I am in the 33%-35% bracket, and no state. So it was never advantageous for them to convert IRAs to Roths for my benefit. I inherited signficant IRAs which now will throw off significant RMDs and there is nothing I can do to avoid the taxation of them. Nevertheless the net wealth transfer is greater than it would have been if my parents had converted in their tax bracket.

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