Wednesday, April 2, 2014

Tax efficient retirement account withdrawals

Over at Bogleheads we came across the following discussion: 

Tax efficient retirement account withdrawals

Postby ralph124cf » Tue Apr 01, 

2014 6:37 pm

I am trying to determine the best way to mix withdrawals from 401(k), Roth and after tax savings in retirement.

My wife and I have just turned 65, and are now fully retired. We have about 3M in IRA/401(k) invested in individual stocks, ETFs and REITS with some gold mine mutual funds. We have 1M in Roth money similarly invested, and about 1M in rental properties with a positive cash flow but a loss for tax purposes. We also have 500K in taxable brokerage accounts and money markets. We own no bonds or fixed income funds.

I expect no further wage income, ever. My current plan is to file and suspend for Social Security benefits when I turn 66, and then the following month when my wife turns 66, she will file for spousal benefits of $14,000/year. The following year, I will file for a PBGC benefit from a former bankrupt employer that will pay $40,000 per year, with joint and 100% survivor benefits. When my wife and I turn 70, we will each qualify for Social Security of $40,000 per year. With a total fixed income of $120,000, I see no reason for fixed income investments at todays interest rates.

One financial adviser has told me that I should first deplete my after tax savings, and then my Roth, before touching my pretax accounts, because this way I would not have to pay any taxes for the first five years or so of retirement.

I think that he is wrong, and that I should take enough from my pretax accounts to fill up either the 25%($148k taxable income) or 28%($226k taxable) bracket. Two other income break points to consider are the Medicare high income penalty premiums that kick in at $170k MAGI ($950/year for a couple) and 214k MAGI ($2500/year). My state does not tax retirement account withdrawals, pensions, or Social Security.

I have been trying to figure out how to minimize the present value of my future tax payments. I have been trying to find an algorithm that would let me figure in higher future tax rates, but have not been able to find one online.

Ideas?

Ralph
Posts: 6
Joined: 1 Apr 2014
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01, 


2014 7:46 pm

You will need to work to figure this out. I don't think anyone is going to do it for you.

The tools to use are described a little bit in this thread: viewtopic.php?t=87471 and they are the tool at www.i-orp.com and TurboTax. You will use i-orp to get a ballpark idea of what to do and then use TurboTax to confirm the idea over many items by creating several "What if?" tax returns over a range of years.

In some sense, you have too much money, so you will have to pay taxes. Nothing wrong with that.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.

Posts: 30476
Joined: 1 Mar 2007
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Re: Tax efficient retirement account withdrawalsPostby JW Nearly Retired » 

Tue Apr 01, 2014 8:24 pm

ralph124cf wrote:One financial adviser has told me that I should first deplete my after tax savings, and then my Roth, before touching my pretax accounts, because this way I would not have to pay any taxes for the first five years or so of retirement.

I don't understand the not paying any taxes the first 5 years. Won't the PBGC pension be taxable income? And some percentage of the SS because you have that income? Also cap gains income you realize from selling taxable account equities?

Anyway, the trouble with the low or no taxes for the first 5 years is then it jumps to a 33% marginal rate. Your IRA/401k could easily grow to $4M in 5 years, and the first RMD on that would be about $150k. That plus your $(40+0.85x80) = $108k other income is an AGI of $258k. I think it would make more sense now, before you get to max SS payments, to take some of the IRA/401k money and do some Roth converting up to the top of the 25% (or even 28%) bracket. The more money you get out of the tIRA and into a Roth, the less RMD you have to take.

The other issue is what do you want to do with your money? Are there heirs or charitable causes you wish to leave money to? A Roth is much more valuable to heirs than a tIRA.

There is a really good Roth Conversion Decision Model Spreadsheet (by our own BigFoot48) that was very useful to me in deciding how to do this. You can download it here: viewtopic.php?f=1&t=97352
JW
Retired Summer 2013
Posts: 3579
Joined: 16 Dec 2007
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Re: Tax efficient retirement account withdrawalsPostby ralph124cf » Tue Apr 

01, 2014 9:57 pm

Hi JW.

You are right that the PBGC would be taxable, but after Real Estate taxes, I would be well inside the 15% bracket. Also I have about 130K of suspended rental property losses that I have not been able to take due to income above 150K.

There are no heirs that I care about leaving money to. There are some default charities in our will, but nothing particularly important.

Ralph.
Posts: 6
Joined: 1 Apr 2014
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Re: Tax efficient retirement account withdrawalsPostby ralph124cf » Wed 

Apr 02, 2014 12:17 am

livesoft wrote:You will need to work to figure this out. I don't think anyone is going to do it for you.

The tools to use are described a little bit in this thread: viewtopic.php?t=87471 and they are the tool at http://www.i-orp.com and TurboTax. You will use i-orp to get a ballpark idea of what to do and then use TurboTax to confirm the idea over many items by creating several "What if?" tax returns over a range of years.

In some sense, you have too much money, so you will have to pay taxes. Nothing wrong with that.


Hi Livesoft.

Thanks for the links. I-orp is especially useful. It seems to be telling me to convert about 200K from Traditional to Roth for the next five years. It seems to want me to go to the max of the 28% bracket. I can't quite figure out how to make the program recognize the adjustment to the social security benefit when my wife switches from 50% of my age 66 benefit to 100% of her benefit at age 70.

Interestingly, the program is telling me that we can spend, after taxes, twice our average before tax earnings over the last ten years until I die at 80, (my estimate) and then at 150% until my wife's death at 105, inflation adjusted. I realize that this is highly dependent on assumptions, but I left in the default 7% earnings assumption, and increased the programs inflation assumption to 3.5%. I also upped the tax rate assumption to 33%. This seems like a higher spending rate than other calculators that I have tried.

Right now I think that I will transfer enough from traditional to Roth to bring me almost to the 214K MAGI Medicare penalty breakpoint.

Thanks,

Ralph
Posts: 6
Joined: 1 Apr 2014
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Re: Tax efficient retirement account withdrawalsPostby scifilover » Wed Apr 

02, 2014 8:40 am

The Medicare surcharge is not material for a person in your situation. You would pay an extra premium of $31 a person per month if you go over $214k. If you project reasonable gains in your tax advantaged accounts between now and the time you turn 70.5, and then look at what your RMD will be at that point, you will understand. I have been working on a similar problem with my IRA. I have managed to move 30% to my Roth. However, I have more in the IRA than when I started, thanks to growth.

Also, you need to spend more money. :D 

Posts: 19
Joined: 14 Apr 2013
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Re: Tax efficient retirement account withdrawalsPostby JW Nearly Retired » 

Wed Apr 02, 2014 11:50 am

scifilover wrote:The Medicare surcharge is not material for a person in your situation. You would pay an extra premium of $31 a person per month if you go over $214k.

$31 is just for medicare D (drug plan). The medicare B + D penalty from crossing $214k AGI is $82/person/month. That's nearly $2000/year for a couple.
JW
Retired Summer 2013
Posts: 3579
Joined: 16 Dec 2007

Posted on 11:54 AM | Categories:

Square integrates with Xero, launches software partner platform / Integrating Square with Xero

HTML Lab writes: Square announced Monday a new integration with the the New Zealand-based cloud accounting software provider Xero. The mobile payments company also officially launched its software partner platform, which extends the Works with Square program that was rolled out earlier this year as a move to allow developers to build accessories for Square businesses. 
The Xero deal follows up Square's November integration with QuickBooks, which enables Square users to import daily sales data into QuickBooks' accounting software. With Xero, Square customers can link their Square and Xero accounts to pull past sales data and daily transaction data into Xero's general ledger.
With both the QuickBooks and Xero deals, Square is laying out its strategy to make its service more useful to merchants, adding frictionless integrations that could potentially extend its footprint. Square said its Japanese counterpart, Square Japan, integrated with the accounting software freee, enabling a data feed from sales to accounting. 
Xero has been trying to build out its North American presence as of late, and last year launched a QuickBooks conversion service to help with migrations from the desktop accounting platform. Last October, Xero rival Intuit released QuickBooks Online as an overhauled cloud version of the accounting software – making the crowded cloud accounting space a tick more competitive. 
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If you already use Xero to organize sales data, you can add your Square account to automatically sync your entire Square payment history. If you don’t have a Xero account, you can sign up for a free trial from the Applications tab in your online Dashboard.
Once you’ve set up a Xero account, you can invite your accountant or bookkeeper to access your business. Each administrator will have access to your information based on enabled permissions. 
Learn more about integrating Square with Xero.
Posted on 7:46 AM | Categories:

Convert from MYOB to Xero with Jet Convert FREE! (Click to View)

Convert from MYOB to Xero with Jet Convert from Xero on Vimeo.  Now's the time to transfer your clients from MYOB to Xero accounting software with Jet Convert. This new conversion tool makes it easier and faster than ever before.
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Conversions take a maximum of three business days. The process is automated, so all the hard work is done for you!
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Posted on 7:45 AM | Categories:

Are contributions to traditional IRAs always tax-deductible, regardless of income?


Over at Avvo.com we came across the following question and answer:

Are contributions to traditional IRAs always tax-deductible, regardless of income?



Contributor Level 9

Answered You can always *contribute* to a traditional IRA regardless of income, but whether you are allowed to take a deduction for that contribution depends on income. Furthermore, whether you or your spouse has access to a qualified retirement plan through employment affects the analysis. The advantage of a non-deductible contribution is that the investment may grow tax free. You should probably see a financial adviser to determine whether you want to go down that road.

Additionally, anyone can currently make a traditional IRA contribution and then convert those funds to a Roth IRA, regardless of income, under current law. However, you should consult with a tax adviser before approaching that technique because adverse tax consequences could result (particularly if you have existing traditional IRA assets). Don't rely on a financial adviser for such a conversion -- they often do no understand the tax consequences.


Posted on 7:45 AM | Categories:

Knives out in Xero, MYOB tussle

SUPRATIM ADHIKARI for the australian writes: The joust between accounting software outfits Xero and MYOB is clearly picking up steam, with both companies embarking on a flurry of deal making and product launches.
Dual-listed Xero has sealed an integration with Twitter founder Jack Dorsey’s payments solutions start-up Square in the US, with the integration to enable customers to link their Xero and Square accounts.
The integration allows transaction data to flow automatically from point of sale from Square to back office accounting software.
The Square deal comes a day after Xero announced a strategic alliance with KPM in the United Kingdom.
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Not to be outdone, MYOB has launched its mobile payments solution MYOB PayDirect as a limited release to early adopters within the Australian SME community.
PayDirect is designed to turn businesses’ smartphones into payments terminals and offers integration with MYOB’s accounting solution AccountRight.
It also enables receipts and invoices to be delivered to their customers on the spot.
The PayDirect launch follows MYOB’s release of two new cloud solutions this week.  
MYOB has introduced Essentials Cashbook (initially in pilot mode), an online solution available exclusively through its partners, which enables accountants to allocate a client’s financial transactions for accounting purposes and manage the level of client involvement in this process.
The second solution is MYOB Accountants Office OnTheGo and MYOB Accountants Enterprise OnTheGo -- a browser-based interface that enables accountants to access their practice management data from any web browser, including mobile devices.
Posted on 7:45 AM | Categories:

Excel for iPad expands the reach of Self Service Business Intelligence

Clear Analytics writes: Excel on iPad expands the promise of Self Service BI by enabling everyday users to distribute information in a manner which now can be easily accessible via the most popular mobile tablet in the world today, the iPad.


Microsoft Excel on the iPad was a very significant element of the Microsoft announcement on March 27th by CEO Satya Nadella. There had been clunky ways of viewing Excel documents in the past, but today’s announcement makes iPad a 1st class citizen in the world of accessing and editing information in spreadsheets. 
There are literally billions of spreadsheets with valuable information locked inside them, silo’d to only be accessed via desktop PC’s or Windows Tablets, however today’s announcement means that spreadsheets are now a viable means to natively distribute information via the iPad. Excel to this day operates in many vital aspects of running a business, the usecases for using spreadsheets are literally unbounded. There has yet to be a major break in Excels dominance, Google Docs is certainly making great progress and a worthy alternative for basic spreadsheet usage. But Excel is not only used for adding a few numbers together, it is also broadly used as a Business Intelligence, Analytics and a Modelling platform. In fact many would say that Excel is the most used Self Service Business Intelligence software on the planet today.
Self Service really is the key term here, literally everyone in the information workforce today has some level of Excel experience. No doubt their is a very wide range of capabilities, some may just consume and add a number or two together, others dive deep into Pivottables, VLookups and Macros. Regardless of abilities; it’s familiar user interface and installed base (1 billion accordingly to Microsoft) is virtually ubiquitous, and this is what makes Excel the most pervasive Self Serve BI product to date. Of course the term ”installed base” is also an important term here, as it now encompasses tablet devices, Excel’s ubiquity is gravelly under threat under the explosive growth of the tablet product category, none of which (prior to the Office iPad announcement) had Excel installed. After the announcement, only a fraction of those devices will have Excel installed. The [somewhat] saving grace for Excel is that there has been no major alternative in the tablet space, Apple’s numbers and Google Docs have nipped away but no-one can declare either of those tools to be an “Excel Killer”.

Mobile-First, Cloud-First

Satya pushed the mantra of being Mobile-First and Cloud-First, both very much go in hand in hand in enabling content to flow freely from device to device. Microsoft’s OneDrive cloud storage helps to deliver the files from your local PC to the cloud, enabling the iPad and future devices to access to them for consumption and modification.
In over 20 years, Excel has vehemently stood the test of time whilst plenty of dedicated BI products have simply come and gone. The advent of mobility was probably the biggest technological shift which may have ‘forced’ Excel off its dominant perch. This ‘better late than never’ situation helps to maintain Excel’s position as the world’s leading productivity tool, only time will tell how much damage was caused due to its delay.
Excel for iPad coupled with products like Clear Analytics help inject clean, accurate and auditable data into spreadsheets, enabling a more controlled and collaborative self service business intelligence environment for companies. Download a free Personal Edition and enable more accuracy, control and trust to your spreadsheets.
Posted on 7:45 AM | Categories: