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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75637  
Subject: Re: Stop contribution to IRA/403(b)? Date: 4/28/2012 12:11 AM
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As best I can calculate, we are in an enviable position, such that, in 7 years, when we have to start taking RMD from our IRA/403(b)accounts, it will be more than we expect to need. I'm wondering if I should stop (this sounds like blasphemy) contributing to those accounts and instead start putting those dollars towards tax-free bonds, so I don't pay ordinary income tax on distributions that I don't need. I haven't done lots of internet research on this, as I just sketched out numbers for one scenario tonight, but I haven't seen a discussion that seems oriented this way. I would like to hear some other opinions, to see if I'm having late-night imaginings!

Congratulations.

If you will both have to start taking RMDs in 7 years, you are each 63 - 64? Because RMDs are not required until the year that the individual who owns the account reaches 70 1/2 - it's not a joint obligation.

When are you planning on actually retiring?

Your question has a lot to do with your tax strategies.

- Will you have to decrease your investments by the amount of taxes you will have to pay because you are no longer taking advantage of the tax deferral? If you are each maxing out a 403(b) at $22,500, that's $45k in income that you are deferring taxes on. At a 25% marginal rate, that would be an extra $11,250 in taxes that you would pay in a year that you completely stopped making contributions.

- Are you planning on retiring prior to when you have to start taking RMDs? If so, will you have the opportunity to convert some/all of your tax deferred accounts to Roth accounts at lower tax rates? You can decrease the amount of RMD that is required by converting tax deferred accounts into the tax-free Roths.

- If you will be collecting SS, will your RMDs increase your income to a level where more of your SS income will be taxable?

- By the time your RMDs start, do you anticipate still being in the same tax bracket? Because while a 3% return on a tax free muni bond is equivalent to 4.6% at a 35% tax rate, it drops to 5.0% at a 25% rate, to 3.5% at a 15% tax rate and 3.3% at a 10% tax rate. So if you anticipate your tax rate will be lower by the time you are taking RMDs, will the tax savings still be worth it?

- Are you going to be living in the same state when you start taking RMDs? Since tax-free bonds are generally only tax advantaged in a single state, which state are you going to focus on if you are moving? Or are you going to try to adjust your bond holdings if you move?

You probably need to consult with a tax professional to help you make this decsion.

AJ
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