This question is about where to put the retirement money to minimize tax.
Does anyone here uses a 7702? what are the pro and cons for such account?
and can the fees be low enough?
tj
A 7702 account is cash value life insurance.
The fees and costs hidden in this product likely exceed any tax savings. Anything an insurance company touches comes with a 20% skim rate.
Much better for most people to just use regular IRA, 401k, and taxable brokerage accounts and “minimize the skim”.
intercst
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"Anything an insurance company touches comes with a 20% skim rate. "
where do you get those numbers? or have you considered a particular situation?
Certainly if that was the case then I should definitely forget about that.
What is your idea of converting TIRA to Roth IRA? I currently am working but I am retiring next year. I am considering doing some conversion next year as my income drops? If the market does not come back too quickly, it may be a good time to do that, right?
I think the assumption in doing that would be that in the long term I would get good gains and that will not be taxed when I draw on it.
My income next year will drop drastically as I will start living on my 5 years saving/cushion. In the next 5 years, I may have to take out some dividends and some capital gain to fund my expenses moving forward. I hope there will be good time in the market in the next 3 to 5 years to do so.
Is that how you would look at it? This is more a strategy to replenish my cushion. Or, do you think this is spurious or ineffective, and I should basically just stick to the withdrawal strategies already mentioned before (4%, RMD, forgo inflation, -10%, guardrail etc…). I am wondering if there are withdrawal strategies that does not necessitate withdrawing annually but more on a need basis and this need basis should be aligned with market conditions.
I think the answer to that could depend on if one is at the start or well into retirement? Certainly good growth in the portfolio in time can simplify the decision process, and I am starting with a good sum, I think that allow some margin w.r.t. what I need but I never can be sure.
tj
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"Anything an insurance company touches comes with a 20% skim rate. "
where do you get those numbers? or have you considered a particular situation?
Certainly if that was the case then I should definitely forget about that.
I look at the insurance company’s profit & loss statement. Premiums collected versus claims or benefits paid. You’ll typically see a 20% gap between the two. There might be some small benefit to cash value life insurance if you’re in the highest tax bracket, but everything has to go right for this to be true. And you’ll have to keep the life insurance policy in place until you die to keep the tax reduction scam going. Do you know what the annual mortality charge against the cash balance is for a 90 year old? Probably 10% of the life insurance payout. It’s a lot safer to just put the money in the S&P500 or Berkshire Hathaway and pay the capital gains when you sell.
What is your idea of converting TIRA to Roth IRA?
I think that’s a good idea.
I reduced my income age 60 to 65 to take advantage of “free Obamacare” since the net present value favored that. Once I turned age 65 and began Medicare, I started doing Roth conversions to level out my expected Federal income tax liability once the RMDs start at age 74 or 75. I’m trying to lessen the jump in my tax bracket once the RMDs commence.
intercst
once the RMDs start at age 74 or 75. - intercst
I must have missed something. RMD’s used to kick in at 70.5 then one of the new laws (Secure Act?) bumped that to 72. Now there is talk of congress considering raising again but as it sets right now, the trigger is still setting at 72. Right?
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Senate Advances Bill to Raise Age for RMDs to 75
https://www.barrons.com/articles/senate-bill-earn-act-rmd-ag…
There are some differences between the Senate and House versions that need to be cleaned up in conference committee, but it’s expected to pass.
intercst
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There are some differences between the Senate and House versions that need to be cleaned up in conference committee, but it’s expected to pass.
intercst
Yippee! As I have posted here over the years I have been aggressively converting TIRA to Roth. I had the goal of draining the TIRA before ever hitting RMD’s. But a few years ago it became apparent that I was going to be two or three years short of hitting that goal. But with three more years to work with and two of them under Biden, my remaining TIRA should not outgrow my ability to convert all of it.
What is your idea of converting TIRA to Roth IRA?
Google it. I think Kitces & others have written comprehensively about it.
The only benefit is that you are shifting when you pay the tax. Now or later. If you are in the same tax bracket later as you are now, there is no benefit.
Probably the only positive benefit of shifting the money from TIRA to Roth is if/when one of a couple dies and the other has to file Single instead of Joint, as the tax brackets come in at lower income levels.
You do not have to transfer cash. All brokers let you do an in-kind conversion, moving stock from TIRA to Roth. People do that all the time.
should basically just stick to the withdrawal strategies already mentioned before (4%, RMD, forgo inflation, -10%, guardrail etc…).
These strategies have been derived for actual historical market conditions. Unless you have a crystal ball and know that the future will be vastly different than the past, stick with one of these tested withdrawal strategies.
I am wondering if there are withdrawal strategies that does not necessitate withdrawing annually but more on a need basis and this need basis should be aligned with market conditions.
People all the time think they know how the market will act. They are wrong.
I think the answer to that could depend on if one is at the start or well into retirement?
Not really. Think about it ---- every day is the first day of the rest of your life. This is the case on the first day of your retirement and is the case on the 10’th anniversary of retirement.
There is nothing (financially) special about the first day of your retirement.
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Senate Advances Bill to Raise Age for RMDs to 75
https://www.barrons.com/articles/senate-bill-earn-act-rmd-ag……
There are some differences between the Senate and House versions that need to be cleaned up in conference committee, but it’s expected to pass.
But don’t get too excited. The RMD percentage is based on your age, not the age at which you start taking RMD. The age 75 RMD is 4.37%.
Every dollar in your IRA is going to be taxed. The only question is when it will be taxed. I think a number of people have determined that you’d be just as well off (or better off) by starting “voluntary” RMD at 70 1/2 or 72 than to wait until later.
Don’t forget that your IRA will grow for an extra 3 years, so the account value that the RMD is applied to will be larger.
If you transfer stocks from the IRA to an ordinary taxable account, the growth will be taxed at LTGC rate whereas if it stays in the TIRA it will be taxed as ordinary income.
A cynic might conclude that raising the RMD age to 75 clears the way to raising the age to collect Social Security.
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A cynic might conclude that raising the RMD age to 75 clears the way to raising the age to collect Social Security.
Another cynic might conclude that it also defers tax collection now for even more taxes to be collected later since the withdrawal amounts per tax year will be higher, likely resulting in those most likely to defer (or their benes) paying a higher marginal tax rate.
Hawkwin
Who wonders just who is the special interest group pushing a change from 72 to 75 - and can’t imagine it is very large.
Daryll: “A cynic might conclude that raising the RMD age to 75 clears the way to raising the age to collect Social Security.”
A real cynic would point out that taking away the Stretch IRA, which was a benefit to many people, in order to raise the RMD age (and be tax neutral) is yet another “gift” to the ultra-wealthy given that most people do not have sufficient funds to avoid taking IRA withdrawals before the RMD age and that a much smaller number of people benefit from the older RMD age than those lost the benefit of Stretch IRAs.
Regards, JAFO
6 Likes
I don’t know why they are raising the rmd age to 75, but it does give me the flexibility to withdraw up to the 24 percent tax bracket from my taxable account for another 8 or 9 years and put that money in brk and low dividend growth stocks to then be cashed when needed.
I don’t feel the least bit hypocritical about taking advantage of tax laws that may or may not be unfair to people who are still working for a living.
A cynic might conclude that raising the RMD age to 75 clears the way to raising the age to collect Social Security.
On the other hand, the cynic would probably see that the decrease of 2.7 years in life expectancy that’s occurred in the past 2 years https://www.msn.com/en-us/health/other/us-life-expectancy-de… would argue against raising the age to collect SS.
A cynic looking at RMDs might conclude that the decrease in life expectancy would encourage the IRS to change back to the previous RMD tables, which require larger withdrawals at each age, since that would increase tax revenues.
Additionally, the same cynic might also conclude that increasing the RMD age to 75 is another way to increase tax revenues from those who take advantage of this opportunity because on average, their accounts will increase at a faster rate than inflation. And because the stretch IRA was eliminated by the original SECURE Act, that the tax revenues collected from non-spouse beneficiaries of those who take advantage of this opportunity will also be increased because of the larger account balances.
AJ
3 Likes
iampops5: “I don’t feel the least bit hypocritical about taking advantage of tax laws that may or may not be unfair to people who are still working for a living.”
I was suggesting that you feel bad about taking advantage of the law taws; I di not recall whcih justice wrote that no on is obliged to arrange their affairs to pay more taxes than required.
Regards, JAFO
…it does give me the flexibility to withdraw up to the 24 percent tax bracket from my taxable account for another 8 or 9 years…
Except that the 24% bracket is scheduled (barring new legislation) to revert to the 28% bracket in 2026, so about 5 years rather than 8 or 9.
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Hi Rayvt,
“If you transfer stocks from the IRA to an ordinary taxable account, the growth will be taxed at LTGC rate whereas if it stays in the TIRA it will be taxed as ordinary income.”
While this is true, it really is not the best thing to do.
You pay the same tax now if you transfer shares from a trad IRA to a taxable account that you will pay if you transfer them to a Roth IRA.
Same tax now but future tax for the Roth IRA is Zero.
“Every dollar in your IRA is going to be taxed. The only question is when it will be taxed. I think a number of people have determined that you’d be just as well off (or better off) by starting “voluntary” RMD at 70 1/2 or 72 than to wait until later.”
For many this is yes. They will probably just slide by taking RMD’s and living on them.
In our case, it would have been horribly wrong and would have shackled us, preventing following some significant changes.
In my planning, our RMD’s at 71 would have been nearly triple what our combined pension and SS income would have been. That was bumping from 6% to 8% as my planning return on investments. When I used 12%, well it was larger and the tax brackets were jumping …
That is the reason I started doing Roth conversions in 2010 when the tax laws changed for conversions. The changes did not affect me but in reading up on then it spurred me to dig deeper into what Quicken planner was telling me that I was not understanding.
Quicken had our taxable account getting larger, much faster, when RMD’s started for both of us. Taxes were also ramping up. When I looked at the cash flows, I saw we (Quicken) were taking a lot of money from our trad IRA’s, siphoning off tax and dumping the remainder into our taxable account. A lot more money than our inflation adjusted expenses.
I fiddled with some transfers (conversions) and found I could convert for 10 years and greatly reduce the increased taxes at RMD time. Essentially smooth them more evenly and eliminate the RMD spike.
So I made a plan and did it. When the tax rates dropped (temporarily), I decided to increase my conversion rate and then it came to this year, 2022, when I could continue just one more year and eliminate our last trad IRA.
Keep in mind, my planning return rate was 6%, 8% and 12% with a tremendous RMD hit tax-wise on unneeded cash that would have gone to our taxable account to pay more future taxes.
Our actual growth, using XIRR to account for cash flows, is just over 20% since 2005. Last November at our peak, our XIRR peaked at 23.36%.
I would not want to even think what our taxes would be now every year on RMD’s.
But, something that never entered my mind was large withdrawals. This came to mind in 2020 in a big way.
Our portfolio had nearly doubled for the year and DW asked if I would consider moving so we started looking for some new ground. When we were ready to make an offer on our new place, I pulled all the cash out, tax free, and made the offer as cash, no contingencies with a request for a 30 day closing. It was accepted and I was able to get a mortgage for about 50% of the purchase price without lengthy background checks, just using the telephone and Docusign. (Photo links below)
Most of the cash to build the house came from our Roth IRA’s also.
If this had all been in our trad IRA’s, we probably would not have done it. Take a $1MM+ out of a trad IRA in one year and look at your tax bill. Then you have to take out more to pay the taxes, but that additional money is also taxable, etc.
No, I have to say that doing at least some Roth conversions can be a benefit for almost every one.
Even while retired, there will be times you could use a “bunch” of cash without worrying about the tax consequences. Family emergencies, renovations/repairs to your house, a new vehicle/boat/shop, etc.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx
Here is our project in progress:
General photos of the land and maps:
https://photos.app.goo.gl/3NC9sbPMxjzUZBc76
Construction: From bare grass on October 5, 2021 to current.
https://photos.app.goo.gl/YdH6e5w4rwz5rknG9
Shop Construction
https://photos.app.goo.gl/rpaeujz6VqhrpZ2z7
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“Every dollar in your IRA is going to be taxed.”
Well…to be a stickler…I think I’d change that to every dollar in your TIRA will at some point be reported as ordinary income on a tax return. Whether it is subject to tax depends on the rest of the tax return.
And the QCD did create an exception to this general rule.
BruceM
3 Likes
“Hawkwin
Who wonders just who is the special interest group pushing a change from 72 to 75 - and can’t imagine it is very large.”
Likely due to political pandering and trying to pay for votes…in this case from the elderly.
A lot of that going on these days
BruceM
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BruceCM:
{{{“Hawkwin - Who wonders just who is the special interest group pushing a change from 72 to 75 - and can’t imagine it is very large.”}}}
“Likely due to political pandering and trying to pay for votes…in this case from the elderly.”
The wealthy elderly, especially the very, very wealthy elderly.
If one is already taking withdrawals before RMD age, especially if close to the RMD amount, then hiking the RMD age is of little benefit.
Only those not withdrawing at all, or minimally drawing an amount well below RMD amount, benfit from hiking the RMD age.
“Paying” for that tax loss from hiking the RMD age by eliminating the “Stretch” IRA altogether with a forced 10-year withdrawal period harmed way more people than the increased IRA benefitted.
Regards, JAFO
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