High-net-worth individuals have over half their wealth in IRAs and 401(k)s
https://www.cnbc.com/select/retirement-accounts-make-up-over…
I find this surprising given the tax consequences of “too much in an IRA” and the tax liability of a large RMD.
What percent of your net worth is in an IRA/401k?
0 voters
Anyone with a large tax-deferred IRA or 401(k) should start gradual conversions to a Roth IRA about 10 years before Required Minimum Distributions to avoid the tax liability of large RMDs. Being careful not to trigger the Medicare IRMAA.
https://www.medicareinteractive.org/get-answers/medicare-hea…
Sometimes I feel like half the financial decisions I make have the $%^& IRS looking over my shoulder.
Wendy
Anyone with a large tax-deferred IRA or 401(k) should start gradual conversions to a Roth IRA about 10 years before Required Minimum Distributions to avoid the tax liability of large RMDs. Being careful not to trigger the Medicare IRMAA.
Depends on the size of the IRA vs. the Federal tax liability on your annual spending.
Once I realized how large my IRA was likely to be by age 70, I started taking penalty-free, SEPP distributions under the 72(t) exception from my IRA at age 40 to whittle it down, and left my taxable account to grow, untapped.
When I could end the SEPP at age 59-1/2, I focused on qualifying for “free Obamacare” from age 60-65 since the $20,000/yr saving on that vs. my health insurance budget had a greater net present value.
Now that I’m on Medicare, I’m doing Roth conversions to level out my tax liability so that I don’t jump more than one bracket once the RMDs begin at age 74.
Lesson here is that if you’re a long-term buy & hold investor and minimize the skim of fees, trading costs and taxes over 40 plus years, good things happen – even if it gives you a “tax problem”.
intercst
None, but including the Condo and a few other assets a bit less than half our net worth is in our two TFSA accounts. Zero tax liability as long as I don’t exceed our maximum contribution limits. Day trading is highly discouraged as it creates administrative costs for Revenue Canada.
Housing prices are too the moon in Halifax but if you sell you need a place to live and those are hard to find with the current boom in population growth … both domestic and international. An identical layout condo in building two in our complex sold for twice the assessed price … I know this because I’ve know the people who bought it for many years. Their daughter went to university with my two and even shared an apartment for a year.
The famous East Coast laid back lifestyle and Nova Scotia have done well from the “Work At Home” thingy.
OT - The California wing of the family made it in (in spite of fog warnings) last night so the whole gang is here for the first time in years.
Even the Saudi university students that live below us are in town.
Tim
" … once the RMDs begin at age 74.
Typo or did I miss something?
<once the RMDs begin at age 74.>
Age 72.
https://www.irs.gov/retirement-plans/plan-participant-employ…
Otherwise, good post.
Wendy
Age 72.
Yes, as a result of the SECURE Act.
The SECURE Act 2.0 has passed in the House and is currently being reworked with bipartisan support in the Senate.
One of the provisions in 2.0, if it remains, will be to increases the RMD age once again: first to 73 by 2022, 74 by 2029 and finally 75 by 2032.
We snuck in just in time to get the delayed age 72 RMDs to this year. I moved our first scheduled RMD to the end of December 2022, hoping that 2.0 passes and I can kick the can down the road 1 more year.
AW
Thanks for the clarification.
Once I realized how large my IRA was likely to be by age 70, I started taking penalty-free, SEPP distributions under the 72(t) exception from my IRA at age 40 to whittle it down, and left my taxable account to grow, untapped.
I started drawing money from my conventional IRA as soon as I could, 59 1/2, for the same reason, whittle down future RMDs.
I also have been managing the IRA more conservatively than the cash account, carrying a much heavier cash position during periods of high risk/uncertainty.
Meanwhile, the divis pile up in the cash account, and are reinvested in something else. At the end of each year, surplus from that year’s IRA distribution is added to the cash account and reinvested.
Of course 20/20 hindsight says I should have converted the entire thing to a Roth in 98-99, when the stack was small. I remember the day, around August of 99, when the IRA first hit six digits. I liked the tax deduction I was getting from the IRA contributions, and, like you, I never imagined the stack would be the size it is now.
Steve
The Club…
About 1%.
Oddly…
I only got a 401K after I retired.
Mistake not to do it before, I know.
I find this surprising given the tax consequences of “too much in an IRA” and the tax liability of a large RMD.
It happens when you are maxing your contributions while in the 32% marginal rate. I didn’t see it was worth using the Roth 401K. I didn’t see my marginal rate being higher than 32% in retirement.
PSU
<once the RMDs begin at age 74.>
Age 72.
…
Otherwise, good post.
Apart from that, Mrs. Lincoln, how did you like the play*?*
Of course 20/20 hindsight says I should have converted the entire thing to a Roth in 98-99, when the stack was small.
Same here, I missed taking advantage of that.
However, the lesson isn’t entirely for naught.
I take some solace from the fact that I’ve passed the info on to my sons and daughters-in-law and they are all taking advantage of learning from my mistake.
AW
Anyone with a large tax-deferred IRA or 401(k) should start gradual conversions to a Roth IRA about 10 years before Required Minimum Distributions to avoid the tax liability of large RMDs.
Aren’t you just trading tax payments now for tax payments later? Why the hurry?
DB2
Aren’t you just trading tax payments now for tax payments later? Why the hurry?
If your RMDs are too large you can push yourself into a higher tax bracket. The Traditional vs. Roth IRA/401(k) debate boils down to tax arbitrage opportunities.
DrBob2 asks,
Anyone with a large tax-deferred IRA or 401(k) should start gradual conversions to a Roth IRA about 10 years before Required Minimum Distributions to avoid the tax liability of large RMDs.
Aren’t you just trading tax payments now for tax payments later? Why the hurry?
Depends on the size of your IRA/401k. If it’s so large that the RMD will kick you into a higher tax bracket, it makes sense to do Roth conversions at a lower tax rate in the years prior to starting the RMD.
Here’s an “oldie but goodie” from the Retire Early Home Page from 20 years ago.
Should I tap my IRA first in retirement?
https://retireearlyhomepage.com/irawithd.html
intercst
How is this info to be used?
The percentage likely varies widely with age. Those employed and saving may very well have most assets in ira or 401k. Those retired, down sized home, inherited assets, etc likely will have smaller percentages in ira or 40¹k.
I dont see a useful purpose.
How is this info to be used?
With caution of course.
intercst
Here’s an “oldie but goodie” from the Retire Early Home Page…
Thank you.
DB2