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Author: KentuckyKate Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76395  
Subject: Stop contribution to IRA/403(b)? Date: 4/27/2012 11:13 PM
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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!
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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: 70605 of 76395
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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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70606 of 76395
Subject: Re: Stop contribution to IRA/403(b)? Date: 4/28/2012 12:33 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!


not entirely clear what you're asking..

you saying that when you start RMDs from IRA/, the RMD will cover expenses?

and asking ,if that be the case, whether to continue to contribute to IRA/
or do something else with savings?

IF that's the case, then Off the Top of my Head, i'd guess that unless RMDs pretty huge, you won't be paying enough tax on them to justify tax-free bonds /but i'd agree no value in adding to IRA --rather put extra savings in Stocks (cap gains ONLY after you sell) and taxable bonds or dividend stocks.

BUT that's just me

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Author: joelxwil Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70607 of 76395
Subject: Re: Stop contribution to IRA/403(b)? Date: 4/28/2012 10:35 AM
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Well, it might be a good thing to put some money into tax-free bonds. However, be very careful. While municipal defaults were generally considered unthinkable until recently, there is very good reason to start to think of it.

Consider Harrisburg, for example: http://www.pennlive.com/midstate/index.ssf/2012/03/unkovic_c...

And I believe that there are others.

Also, it might be better to store up some cash, since sooner or later the Fed will raise interest rates and this will cause a decline in all except short term bonds.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70608 of 76395
Subject: Re: Stop contribution to IRA/403(b)? Date: 4/29/2012 12:30 AM
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One factor to keep in mind is to look at what will happen to the money when it is eventually inherited by someone other than a spouse. It could be that the estate planning issues are more significant than the taxes that are currently being paid.

If the money will eventually go to a person then the tax advantages of having the money in a retirement account could be worth a lot especially if they will likely be in a lower tax bracket than you. If it will go to a charity then the charity may be able to inherit the retirement account without taxes on it ever being paid.


It would depend on the details of your situation but the using the funds to pay the taxes for doing a partial Roth conversion might be a good choice.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70609 of 76395
Subject: Re: Stop contribution to IRA/403(b)? Date: 4/30/2012 9:11 AM
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All else being equal, I would opt for a Roth over doing munis. Even if your income is too high for a Roth, you can do an IRA and then immediately convert it to "back door" a Roth contribution.

As someone else stated, your current tax vs future tax situation would weigh heavy in this decision.

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Author: StockGoddess Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70613 of 76395
Subject: Re: Stop contribution to IRA/403(b)? Date: 5/5/2012 1:59 PM
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Why Harrisburg went bankrupt - a stupid and dishonest mayor

http://www.youtube.com/watch?v=shI5oOTMkMk&feature=playe...

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