UnThreaded | Threaded | Whole Thread (15) | Ignore Thread Prev Thread | Next Thread
Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75880  
Subject: Pay the tax or not? Date: 7/26/2000 9:31 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I posted in the Tax Strategies folder, but have not gotten much response.

I am 57 yrs old. I have a pre-tax account in the mid 6 figures, and it is paying a guaranteed 8.5%, tax free until withdrawal. At age 70 1/2 the fed will determine how long I will live(strange how they can do that), and I will have to have a strategy in place at that time that will deplete that account at the age they say I will die. (in this case 85)

I am thinking that when I retire next year, that instead of waiting until I am 70 1/2, I will begin immediately taking about $2000 per mo. out of it, paying the tax, and reinvest in something like an index fund.

My thinking is that if the fed says that I am going to die at 85, if I wait until I am 70 1/2, I will only have 14.5 years to spread out the disbursment, whereas, if I begin next year, I can extend the period over a longer period, and the disbursment will keep me in a relatively lower tax bracket.

In addition, I think that the index fund will at least keep up with what would have been in the account gaining at 8.5% even after I pay the taxes. If not, in about 10 years, I can reevaluate, since I will only have drawn the original fund down by approximately half.

I can also take advantage of dollar cost averaging, and take advantage of the time element (what there is left at my age) by taking the disbursment now.


What do you think, draw out the money and pay the tax or leave it where it is gaining at 8.5% tax free until 70 1/2?

In a related question, if my strategy is viable, in consideration of the brokerage fees, should I take a once a year disbursment and invest or disbursement monthly and invest monthly?

The $2000 per mo disbursment along with my regular pension will place me in the $120,000. per year pre tax dollars.

Arlie
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23712 of 75880
Subject: Re: Pay the tax or not? Date: 7/27/2000 9:53 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Greetings, Arlie, and welcome. You wrote:

<<I am 57 yrs old. I have a pre-tax account in the mid 6 figures, and it is paying a guaranteed 8.5%, tax free until withdrawal. At age 70 1/2 the fed will determine how long I will live(strange how they can do that), and I will have to have a strategy in place at that time that will deplete that account at the age they say I will die. (in this case 85)

I am thinking that when I retire next year, that instead of waiting until I am 70 1/2, I will begin immediately taking about $2000 per mo. out of it, paying the tax, and reinvest in something like an index fund.

My thinking is that if the fed says that I am going to die at 85, if I wait until I am 70 1/2, I will only have 14.5 years to spread out the disbursment, whereas, if I begin next year, I can extend the period over a longer period, and the disbursment will keep me in a relatively lower tax bracket.

In addition, I think that the index fund will at least keep up with what would have been in the account gaining at 8.5% even after I pay the taxes. If not, in about 10 years, I can reevaluate, since I will only have drawn the original fund down by approximately half.

I can also take advantage of dollar cost averaging, and take advantage of the time element (what there is left at my age) by taking the disbursment now.


What do you think, draw out the money and pay the tax or leave it where it is gaining at 8.5% tax free until 70 1/2?

In a related question, if my strategy is viable, in consideration of the brokerage fees, should I take a once a year disbursment and invest or disbursement monthly and invest monthly?

The $2000 per mo disbursment along with my regular pension will place me in the $120,000. per year pre tax dollars.>>


Your approach is valid. Some folks will definitely benefit by drawing down an IRA prior to reaching age 70 1/2. If you have run the numbers, then you will have determined whether it makes sense in your situation. And as to how to take the money if you elect to do so, I personally would prefer the annual as opposed to monthly approach to keep broker's fees down.

Regards..Pixy

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23734 of 75880
Subject: Re: Pay the tax or not? Date: 7/27/2000 6:07 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
am 57 yrs old. I have a pre-tax account in the mid 6 figures, and it is paying a guaranteed 8.5%, tax free until withdrawal. At
age 70 1/2 the fed will determine how long I will live(strange how they can do that), and I will have to have a strategy in place
at that time that will deplete that account at the age they say I will die. (in this case 85)


Remember the Fed only gets this right 50% of the time. In fact they might get it wrong 100% of the time since the age is an average.

Your plan is ok.

I would take out on Jan 2 and invest 100%. I do not see a big advantage to dollar cost averaging in you plan.

Print the post Back To Top
Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23736 of 75880
Subject: Re: Pay the tax or not? Date: 7/27/2000 8:48 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
The key here is that you plan to retire next year.
You are not old enough to start receiving social security.
The reason I have not touched my IRAs is that I'm still working and I'd have to pay a higher rate of tax on withdrawals than will be the case if I wait until either I retire, or age 70 1/2, whichever comes first.
Presumably your income in retirement will be some combination of withdrawals from your IRAs and withdrawals from taxable investment accounts. Later on, there will also be Social Security.
To start getting some of that money out of the taxfree accounts makes sense to me.
Best wishes, Chris

Print the post Back To Top
Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23772 of 75880
Subject: Re: Pay the tax or not? Date: 7/29/2000 9:10 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Thanks, I guess I just needed to hear someone else agree with my strategy and see if anyone sees any holes in my plan.

Arlie

Print the post Back To Top
Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23773 of 75880
Subject: Re: Pay the tax or not? Date: 7/29/2000 9:27 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
It is hard to get everything into a post, but what I said was a little misleading. I have never paid social security, well a little when I was 18 or 19, and I can draw my pension and whatever I want from this other fund (it is called DROP), without tax penalties. That being the case, if I draw only my pension and the interest off the DROP account, I will be getting a $40,000 a year increase over my present salary. That in itself should put me in a higher tax bracket. If I decide to draw an additional $2000 per month from DROP, that will place my increase in withdrawals to $64,000 per year above my present salary, but if the numbers are correct, that will deplete the DROP account in 25 years. My plan is to reinvest the additional $2000 ($1400 after-tax) and by the time that depletion occurs, the reinvestment should be enough to take over from the loss of the DROP, and my life style should remain seamlessly intact.

Print the post Back To Top
Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23776 of 75880
Subject: Re: Pay the tax or not? Date: 7/29/2000 1:17 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
The decision of when to draw from a retirement plan, in my view, is an analysis of tax consequences. You have been thinking about this. So you run the numbers and do what works for you.
Good luck! Chris

Print the post Back To Top
Author: Chipsboss Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23777 of 75880
Subject: Re: Pay the tax or not? Date: 7/29/2000 4:06 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
for arlie5, who expressed interest in spreading his IRA withdrawals out over a longer time

At age 70 1/2 the fed will determine how long I will live (strange how they can do that), and I will have to have a strategy in place at that time that will deplete that account at the age they say I will die. (in this case 85)

Short answer: (1) You do not in fact have to accept the plan to use up your IRA by age 85. Depending on your choices, IRS allows you to keep the IRA going to age 110 without penalty. (2) You can preserve your flexibility by making no IRA withdrawals before age 59.5, which is not far off for you.

Long answer: Surprisingly, no one here has yet pointed out that you do in fact have more flexibility than "depleting the account at the age they say I will die". According to my present understanding of the IRS 590 at http://www.irs.ustreas.gov/forms_pubs/pubs/p5900107.htm you have the option of using the term certain method (in which your life expectancy declines at the rate of one year per year) and the recalculaton method (in which your life expectancy declines at a smaller rate. The IRS life expectancy table is at http://www.irs.ustreas.gov/forms_pubs/graphics/15160x17.gif .

Your previous post contemplated using the term certain method. If you chose the term certain method at age 70 (and use single life expectancy), your withdrawal that year must be at least 1/16 of the IRA's value at the end of the prior year. Subsequent year's minumum required withdrawals are 1/15th of the IRA at age 71, 1/14th at age 72, etc. , down to 1/2 at age 85 and the entire balance at age 86. Under this option, you will indeed deplete the account at age 86 -- but you have another option -- the recalculation method.

If you chose the recalculation method, you look up a new life expectancy from the table each year. Then your withdrawals (per the table cited above) are 1/16 the first year as before for age 70, and 1/15.3 at age 71, 1/14.6 at age 72, etc. where 15.3 is the table's life expectancy for you at age 71, 14.6 is the life expectancy at age 72, etc. Under the recalculation method, you can keep the IRA tax shelter going until age 110. (We should all live so long.)

Second point: If you start withdrawals next year at age 58, you must either pay a 10% penalty on any withdrawals prior to age 59.5, or set up a "substantially equal periodic payment" (SEPP) plan that binds you to continue withdrawls for at least five years (as I recall). If instead you wait just one year or so, and make your first withdrawal in the year in which you become age 59.5, then you can make 11 annual withdrawals of whatever size suits your purposes at that time, from 0% to 100% of the remaining balance. (You can find out far more than I know about SEPP's by searching for the expression "substantially equal periodic payments" on this board and the Retire Early Home Page. Please ask if this is unclear.)

Chips, happily retired seven years and yet to make an IRA withdrawal


Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23779 of 75880
Subject: Re: Pay the tax or not? Date: 7/29/2000 5:38 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Great information. I was completely unaware of the term certain and recalculation rules. That will certainly give me something to chew on for a while.

While it is not necessarily important, since you seem to have a more than nominal interest in this, Let me explain a little.

My account is not a true IRA. When I was 50, I told the pension board that I was retired, they figured my pension and began paying it, however, they payed it, tax deferred, into a Deferred Retirement Drop Account (D.R.O.P.), however, my employer still considers me gainfully employed. Through some special rules for this type account, the 59 1/2 criteria is not applicable after age 55 for me. I can withdraw as much as I like without the penalty. I only pay the tax. Prior to age 55, the SEPP rules did apply.

When I decide to fully retire, the pension board begins paying my retirement check directly to me, and whatever I had accumulated in the DROP account becomes a part of my estate. At that time I have several options. I can leave it in the account and have it draw 8.5% pre-tax, or draw out the interest or any portion that I wish. I just have to pay the tax on the amount that I withdraw, however, the 70 1/2 rule is applicable, or as you suggest, I may have other oprions here.

Thank you for the information.

BTW, it is always good to hear from those who have retired and enjoying it.


Arlie










Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: tankcmdr1 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23798 of 75880
Subject: Re: Pay the tax or not? Date: 7/31/2000 12:39 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 6
I am about 7 years ahead of you - 63. Two years ago my attorney suggested I investigate beginning to draw down my IRA which was in low 7 figures. Reasoning was he had started to see older clients - 70 1/2 and older - running into large income tax burdens because of the requirement to begin withdrawing based on the governments formula. Further, these large IRA's were causing estate tax problems when clients died.

Up to that point I had been protecting my IRA and using other investments to live on. Since then I have begun taking down my IRA and to the extent I do not need the funds, investing them. As I am heavily invested in technology I expect to accumulate substantial unrealized appreciation in my taxable portfolio as time goes by.

The premise seems to be that it makes sense to preserve your IRA until retirement (not necessarily 70 1/2) and begin taking down your IRA as soon as practical after retirement (and after the penalty stage).

I have recently had my situation reviewed by a CFP and they concurred with the early draw down of the IRA.

One fools humble opinion.

Print the post Back To Top
Author: SubmariningFool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23802 of 75880
Subject: Re: Pay the tax or not? Date: 7/31/2000 4:26 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Arlie,

I'm not familiar with the rules on the DROP you've described, but there's an option that hasn't been discussed that may be beneficial if you're eligible for it.

As I understand your situation, you don't really need the money now. You just want to take out some money now (and reinvest it tax efficiently) to avoid being forced to take (and pay taxes on) larger distributions than you think you will need when you have to start taking mandatory distributions. If this is the case, and you are eligible (AGI under 100K), you may want to consider doing annual conversions to a ROTH IRA. This will save the large tax bite later and convert at least a portion of your IRA to a tax free account that will not have mandatory distribution requirements. You can always take out the conversion amounts without paying taxes (you've already paid them) and after five years, even the earnings would be tax free. If you don't need the money during your lifetime, your heirs could withdrraw the money over their lifetimes' tax free.

David

Print the post Back To Top
Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23804 of 75880
Subject: Re: Pay the tax or not? Date: 7/31/2000 6:49 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Thank you David,

The first thing I want to say is that this is the first internet site that I have ever seen that is so helpful.

I feel like the Jebs? in the "Grapes of Wrath" after all the trials and tribulations of coming from Oklahoma during the dust bowl, they finally rolled into the government housing park. Whew!!!!

Roy Lewis has a series of articles regarding Roth IRA's that are extremely helpful. If I am understanding what he, through the articles, and you here, are saying, I am leaning toward converting at least some of my DROP account to a Roth IRA. I can convert $90,000 this year into it. However, when I retire next year, I will have a problem. My pension will exceed the $100,000 limit, but it will be from a pension and not earned income.

I guess I will need to pore over the article to get a clearer understanding of earned income as it relates to conversions and the rules governing income from a combination of a pension and growth from the DROP account.





Print the post Back To Top
Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23808 of 75880
Subject: Re: Pay the tax or not? Date: 7/31/2000 8:51 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Arlie5 sez:

<<I guess I will need to pore over the article to get a clearer understanding of earned income as it relates to conversions and the rules governing income from a combination of a pension and growth from the DROP account.>>

Careful now... Conversions are not contingent on earned income but on adjusted gross income. AGI includes earned income as well as pensions, capital gains, interest, etc. If your modified AGI exceeds $100k, then a conversion will not be allowed.

Regards..Pixy

Print the post Back To Top
Author: arlie5 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23809 of 75880
Subject: Re: Pay the tax or not? Date: 7/31/2000 9:27 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Yeah,

I just found that at another page. Drat....

Arlie

Print the post Back To Top
Author: hflygare Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24040 of 75880
Subject: Re: Pay the tax or not? Date: 8/10/2000 10:22 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I have been looking at a similar situation and have some of your same problems. To wit (and what is a wit?) many variables such as tax rates at different income levels, different rates of return, estate tax,versus gifting, versus insurance trusts etc. Pretty much has my head spinning. This and similar forums have some great info but how to put it all together. What I need is CFP or some such ilk that can put all this into a spread sheet and play with the numbers. I don't have the tax knowledge or the spread sheet magic to make it work. So my solution is to hire someone to do this. The cost in my oppinion will far outweigh a major goof on my part. Good luck.
Hans

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (15) | Ignore Thread Prev Thread | Next Thread
Advertisement