A close friend of mine has a unique tax situation for 2011. Long story short his itemized deductions plus exemptions exceed his taxable income on his Federal 2011 return. Therefore he has a -0- tax liability. He has no money withheld from his pension and SS, so there is no problem with under withholding. However, he has a TIRA and I wanted to advise him that IMO he may missing a tax saving strategy .He is 68 files MFJ and his combined deductions & exemptions exceed his taxable income by roughly $10K for tax year 2011 and will probably be the same for 2012. All of his taxable income is derived from his pension and SS benefits. For the 2012 tax year why could he not estimate and calculate what his net negative taxable income will be and withdraw that amount from his TIRA? He will still have a Federal -0- tax liability and he would be able to make a net tax free withdrawal from his TIRA. In addition his future RMD's would be less. This seems to me like a no brainier (but I've said that before and ate crow). I realize this does not address State income tax issues and I will get further info from him regarding PA state taxes.Phil, Ira, Peter et al... what the heck am I missing guys? TIA,RichArizona
what the heck am I missing guys? What you're missing is, assuming he doesn't need the cash, rather than withdrawing that amount he should convert it to Roth. Same tax-free outcome, but the money also grows tax-free. No RMD's from Roths, so it also reaches that goal.PhilRule Your Retirement Home Fool
What you're missing is, assuming he doesn't need the cash, Thanks for the prompt reply Phil. Unfortunately he does need the cash to live on but I will be talking with him later today. However, you make a good point Phil ... as usual. Maybe a blend of both TIRA withdrawals and a Roth Conversion may be the ticket to provide with him the cash he needs for daily expenses and yet provide him with some tax savings. Thanks again Phil.RichArizona
Unfortunately he does need the cash to live on but I will be talking with him later todayMaybe not today, but sometime someone should talk to him about his finances and budget. You mentioned RMD's, which indicates he's not in his first youth. I realized that I needed to get more involved in my parents' affairs when my father asked me to look at his checkbook to see if I could figure out why he had so much in his checking account. Turns out that when he faithfully balanced the checkbook each month he was adding the outstanding checks to the checkbook balance rather than subtracting them from the statement balance. Message: the old boy's slipping a bit.My overall point is that the purpose of retirement savings is to have money to live on in retirement, not to save on taxes. He should be using what he needs, taxes be damned, within the constraints of future needs and assets.PhilRule Your Retirement Home Fool
My overall point is that the purpose of retirement savings is to have money to live on in retirement, not to save on taxes. He should be using what he needs, taxes be damned, within the constraints of future needs and assets. Well said Phil and I agree. I will know more after I speak with him this weekend. As I said in my post he is 68 and will be 69 this month so RMD's are about a year away. He is retired, very conservative and does have a budget which he monitors very closely. He is carefully drawing down his "substantial" retirement funds at a 3~4% yearly rate to help meet his yearly expenses. However, he may be missing a good tax saving opportunity in the way he is making his withdrawals. I will know more later this week. Thanks again Phil.RichArizona
what the heck am I missing guys? What you're missing is, assuming he doesn't need the cash, rather than withdrawing that amount he should convert it to Roth. Same tax-free outcome, but the money also grows tax-free. No RMD's from Roths, so it also reaches that goal.another thing to keep in mind --as more is withdrawn from tIRA (or converted to Roth), more of SS is taxable ??
Hey Phil,I talked to my friend and he was absolutely ecstatic about your recommendation to do a Roth conversion. Fortunately, he has an existing Roth which he established well over 5 years ago, but has not been able to fund while he was employed. I will also ask him to calculate if there is any impact on the taxation of his SS benefits as noted by the previous poster.I have followed this board daily for ~ 10 years and I want to personally thank you for all the learned information which you freely and sometimes humorously provide to all us Fools who are often overwhelmed and lost in the infinite maze of IRS regulations and tax laws.Sincerely,RichArizona Posted & PM'd
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