JWR:

 

Thanks for your response. I understand all 3 of your points and have taken them into consideration.

Taxes don't drive my decisions, but I am unclear on the nuances explained in my iniital post--the downside of perhaps being 70% in an IRA versus perhaps 30%.

I do have a separate "emergency" taxable account that is above and beyond the accounts mentioned in my initial post. It is almost entirely a money market fund.

 I would appreciate any insight into the specific questions posed in the iniital post.

 

ignatz:

 I am single, 63, in good health, still working, renting, and in the 28% bracket. I will get roughly 1k per month in SS beginning at 66.

I can legally continue to contribute up to 20.5k to the 401k every year and immediately move that 20.5k at will into the IRA. So, I can contribute a total of 26.5k annually to IRAs, if I choose to. 

That would shield me from immediate taxes and lower my taxable income, but would subject me to an even higher RMD in my early 70s.

How undesirable are RMDs when the effective alternative is a taxable account? 

I assume your employer does not match any of your 401k contributions, and your only source of income in retirement will be from SS and investments (no pension or annuities),  

The main issue is at what rate your RMDs will be taxed and if, without the RMD, you can avoid taxation of your SS benefits.

Generally, if the RMD plus SS income will be taxed at less than your present 28%, it would be best put as much as possible into an IRA account

If you will be in a higher (or equal) bracket in retirement, then paying tax now and maximizing a Roth account would be advantages.

I would run the numbers on taxation at retirement using today's rates, but keep in mind that the government could raise or lower the rates by the time you reach retirement. 

(Also note that when some retire, they postpone taking SS so that they can convert their IRA to Roth status at lower tax rates, before reaching RMD time).

Dick 

 

 

 

 

Ignatz,

I think you have asked some very good questions, however I don't think anyone can give you an answer expressed as a percentage.  I would like to have 100% in a ROTH, but that is not possible.

I would take a hard look at what you expect your expenses will be after you retire and start spending the portfolio.  How much will you want/need to withdraw from the portfolio per year.  I would attempt to match the dollar amount in a 401K or regular IRA so that the RMD amount does not exceed your spending needs.  You have no choice on the RMD, it must be withdrawn, and you will have to pay the taxes on that amount in the year that it is withdrawn.  In an ideal situation, the $ amount in the IRA/401K will support the RMD which matches your cash flow needs.  I hate the thought of the IRS forcing me to withdraw more than I need to meet my expenses.

Any excess portfolio value would be better off in a ROTH where you can decide if and when you want to withdraw from it, tax free, while the value can build up without creating a taxable event caused by dividends and capital gains.

Then there is the question of what do you plan to do with the leftovers.  You stated that you were single, but did not say if you have children or others that you wanted to leave an estate value to.  If that is part of your plan, then don't overlook the step up value of equities when received as an inheritance from a taxable account.  That could be a valuable tax planning tool for the next generation.

I would suggest that you don't reply stating any of your personal dollar amounts on this forum or anywhere on the internet.  The above questions are for you to think about in dollar terms instead of percentages.

I will have to start taking the RMD from my 401K next year, so I have thought about this.  But the ROTH IRA option did not exist until after I retired and all we can do is make the most of the options that are/were available to us.  

Gordon

Dick:

Thanks for the response. You are correct in your assumption that all I have is my investments and SS.

For single people, the 28% bracket goes from roughly 31k to I think about 77k. I am in the midrange of those numbers and expect to stay there, barring job loss or Congressional action on tax rates. 

I hope to be able to work beyond the date I must take RMDs. I expect to "retire" only when forced out.

It's very, very unlikely I will ever have income beyond the current 77k upper limit of the 28% bracket.

For a back of the envelope calculation, figure 50k taxable income if I am still working, plus whatever the RMD might be on say 100k IRA, plus 12k per year from SS, plus. I am guessing that would still fall below 77k.

Of course, it is possible I could be unemployed or unemployable at age 73, and my income then would be SS plus RMD plus net return on the remaining portfolio, with no earned income. If that were the case, my income might be say 20k or 25k, which would mean a lower tax bracket.

My tentative plan is to maximize my Roth in any case. My questions relate to how much I should put in the IRA (not the Roth) over the next 8 or 10 years. The more I put in, the greater the RMDs.

Depending on my employment and health status, I could be forced into making substantial withdrawals from any or all of my accounts at any time simply to keep a roof over my head.

Am I correct that postponing SS beyond 66 means I will get more when I do elect to take it, but that at some age (70?), further postponements don't mean a larger eventual monthly payment?

Any further insight?

 

Gordon:

To your points:

I will try to avoid referring to dollar amounts per your suggestion, but can say this:

Estate planning is completely irrelevant. It’s me versus the actuarial tables.

I expect to stay single and remain in the mid-range of the 28% bracket so long as I am employed, but all bets are off if I lose the job or have health issues. I have no qualms about working until I can’t. I have resigned myself to that. So "retirement" will be forced.

I must deal with the idea of rent probably doubling in the next 10 to 15 years.

I can currently save at least 25% of gross income. The Roth will be maxed out. My question effectively is how much of the remainder should go to the IRA versus taxable.

Just using random numbers, how large must an IRA be to force a 20k RMD?

Taxable accounts obviously have the advantage of no RMD, but does that advantage offset the IRA advantage and how do I quantify it?

Hello Ignatz,

---------------
How do you all feel about the advantages of increasing the IRA percentage significantly to take advantage of more compounding versus the disadvantage of even higher RMDs??

Or should I restrain my impulses and keep the taxable account around, and maybe keep the IRA in check at say no more than 40% or 50% of total portfolio??

How undesirable are RMDs when the effective alternative is a taxable account? I guess it’s a comparison of the negative effect of losing the compounding effect on the forced withdrawals versus the negative effect of paying taxes now on taxable income.
---------------

---------------
If you will be in a higher (or equal) bracket in retirement, then paying tax now and maximizing a Roth account would be advantages.

I would run the numbers on taxation at retirement using today's rates, but keep in mind that the government could raise or lower the rates by the time you reach retirement.

(Also note that when some retire, they postpone taking SS so that they can convert their IRA to Roth status at lower tax rates, before reaching RMD time).
---------------

 

If I were in your circumstance, I'd seriously consider doing the following:

* max contribution to Roth [6k (+unknown future increases to max)]
{ you're doing } --> no RMD & tax-free earnings

* max contribution to 401k [20.5k (+unknown future increases to max)]
{ you're doing } --> decrease to AGI optimized

* move 401k contributions to IRA
{ you're doing } --> better investment options than 401k

* partial conversion of IRA to Roth [amount = ? / & don't have taxes withheld from such -- pay from another source]
--> $ not subject to RMD
-->--> [deadline for given tax year = end of calendar year -- i.e. does *not* have same deadline as IRA contribution deadline]

Depending on potential variation to income, & overall tax circumstance for a given year (including impact due to taxable investments), you could analyze such (realizing that there will be some educated guesses involved, due to one likely not having full picture of such (& particularly re: taxable investments) until after the end of the calendar year), & determine just how much of a conversion would be practical or otherwise ~'optimal' for a given year (e.g. if there were a year when contributions to a Flexible Spending Account were increased, one could 'utilize' such to 'offset' [the AGI increase from] a corresponding increase in amt to be converted to Roth for that tax year).

If you have your existing IRA invested in holdings you'd like to maintain/leave-alone/not-remove, could avoid doing conversion from the existing IRA by targetting conversion of subset of yearly 401k --> IRA $.

Additionally, if you have the luxury of contributing the max to 401k as early in the year as possible, & then moving the 401k contributions to IRA as early in the year as possible, could perform partial conversion of that year's contributions as early in the year as possible (assuming that you know @ least the minimum of how much you would convert for that year), to optimize the length of time during which the converted $ is working on generation of tax-free earnings in Roth.

I realize that there are circumstances when this/conversions would not necessarily be optimal (e.g. if in lower tax bracket during retirement), & that none of us can predict the future.  Additionally, I realize that 'lower' tax bracket is relative, & if taxes are increased in the future, one could perhaps find (much to one's dismay) that the taxation rate associated with current tax bracket happens to ~equate to taxation rate associated with the future's version of a 'lower' tax bracket.  Again, we just don't know what will happen in the future, & thus, we simply do our best to 'cover bases', etc.

I, personally, would prefer the option of partial conversions, in order to [1] increase the amount of ~'I determine whether & when' $ (re: no RMD), [2] increase the amount of $ eligible for tax-free earnings, & [3] increase the amount of $ that I would consider 'last resort' (I find the 'if you leave it alone, it has the chance to garner additional tax-free gains' aspect of a Roth to be a kind of ~'force field', psychologically, & one which motivates me to 'stay away from, & for as long as possible'.  Lastly, should there be $ in Roth when I passed away, the tax advantages associated with inheritance are positive in several respects (for me, this is a technical consideration, & not one which would drive my savings or potential withdrawals / is a 'bonus').

Just another option, & some thoughts regarding...

LWCTS:

I appreciate the additional ideas.

Regarding conversion of an IRA to a Roth:

If I contribute the annual maximum of 6k directly to my Roth, am I prohibited from converting anything from IRA to Roth—that is, does the 6k limit apply to any combination of conversions and direct contributions?

I know little about conversions, but am aware that some people do it to the extent it won’t push them into a higher bracket. I am currently in the 28% bracket and that is not likely to change as long as I am working.

Is the following the consensus of what I should do, in this order of preference, so long as it meets my overall asset allocation:

Max out Roth contribution with first 6k of available funds

The next 20.5k should go to the 401k and immediately into the Rollover IRA.

Put anything beyond that into the taxable account.

I could do the above, but I am not likely to have more than 26.5k of investment funds in any one year, which would mean that taxable would stagnate where it is and fall to 10% or less of my portfolio within 5 or 6 years.

Under that scenario, RMDs would be "high", but would not likely be more than my cash requirements if I weren’t working. If I was still working at 73 or 77, the RMDs might not be "needed", but would not likely be enough to push me beyond the 28% bracket limit of 77k and rising.

I work for a small company and could immediately request my boss to start an 80% or 90% payroll deduction to get as much of this year’s allowed 20.5k into the IRA as possible. I could live off my money market fund or taxable account sales for the rest of the year if need be.

Is this hare-brained?