Retirement SOS: Finance question

[tvguy]

I retired at 50. The best thing you can do for a bountiful, well funded retirement is easy and difficult all at once.
Invest 35-50% of your income. Don’t let lifestyle creep keep you working late in life.

Never reached that level of investing. Did manage the maximum 15% (plus 4% company match) in an 401k. And we put the maximum $1,500 annual limit (later $2,000) in an IRA before 401k's existed. My wife has one IRA account that started with a single $1,500 contribution in 1980, the balance today is mind blowing.

 

[QueenIsabella]

Never reached that level of investing. Did manage the maximum 15% (plus 4% company match) in an 401k. And we put the maximum $1,500 annual limit (later $2,000) in an IRA before 401k's existed. My wife has one IRA account that started with a single $1,500 contribution in 1980, the balance today is mind blowing.

Ah, the magic of compounding! DS18 got a statement for his Roth IRA yesterday--we started it as soon as he had earned income. He had ~$3k in there (he only works 10 or so hours a week while in school). He goes, "why do I care?" And I said, "Just leave it alone for 50 years--then, you'll care!"

I also pointed out the importance of knowing when you deposited the money. One thing I think isn't emphasized enough is the ability to withdraw from a Roth after 5 years. Obviously, the real benefit is from leaving it alone, and my hope is that, after 5 years have passed, the person doesn't even consider withdrawing. But--it's tough to get a young adult to think on a 40-50 year time horizon. They can't imagine being retired, they haven't started a "real" job yet! But, maybe they can see 5 years down the road (graduating college, for my youngest--it's reachable). Now, if my child was in a position that tapping their Roth seemed like a viable option, we'd encourage them to talk to the Bank of Mom and Dad--open 24 hours, low interest rates! rather than withdrawing from a Roth to buy a house or start a business.

 

[tvguy]

Ah, the magic of compounding! DS18 got a statement for his Roth IRA yesterday--we started it as soon as he had earned income. He had ~$3k in there (he only works 10 or so hours a week while in school). He goes, "why do I care?" And I said, "Just leave it alone for 50 years--then, you'll care!"

I also pointed out the importance of knowing when you deposited the money. One thing I think isn't emphasized enough is the ability to withdraw from a Roth after 5 years. Obviously, the real benefit is from leaving it alone, and my hope is that, after 5 years have passed, the person doesn't even consider withdrawing. But--it's tough to get a young adult to think on a 40-50 year time horizon. They can't imagine being retired, they haven't started a "real" job yet! But, maybe they can see 5 years down the road (graduating college, for my youngest--it's reachable). Now, if my child was in a position that tapping their Roth seemed like a viable option, we'd encourage them to talk to the Bank of Mom and Dad--open 24 hours, low interest rates! rather than withdrawing from a Roth to buy a house or start a business.

My IRAs are all traditional. My Financial Planner and CPA all crunched the numbers on rolling them into Roths and the tax burden was staggering. As for opening a new IRA, I think you really have to look at tax situation to decide if you should go with a Roth or a traditional. My daughter opened a Roth because at her income level, with a mortgage, there was little tax benefit to a traditional. But she is losing out on the compounding of the money she spent on taxes.
For my wife and I, our retirement plan was centered on reducing taxes while we were working, and paying taxes in retirement when we expected to be.......and are....in a much lower tax bracket. Hopefully, we won't start RMDs until age 72, we are both 66, so that is another six years of compounding.

 

[RivShore]

My IRAs are all traditional. My Financial Planner and CPA all crunched the numbers on rolling them into Roths and the tax burden was staggering. As for opening a new IRA, I think you really have to look at tax situation to decide if you should go with a Roth or a traditional. My daughter opened a Roth because at her income level, with a mortgage, there was little tax benefit to a traditional. But she is losing out on the compounding of the money she spent on taxes.
For my wife and I, our retirement plan was centered on reducing taxes while we were working, and paying taxes in retirement when we expected to be.......and are....in a much lower tax bracket. Hopefully, we won't start RMDs until age 72, we are both 66, so that is another six years of compounding.

Can I ask if you are still working and if not, what are you living off of while you wait to take RMD's?

We have taken the same approach as you - reduce taxes while working - so we don't have much in Roths. Coincidentally, we were just debating whether we should max out a Roth 401k over our last few years of working, that way, we would delay hitting up our traditional IRSs/401ks and paying taxes on those withdrawals.

Now I also question if I made a mistake not putting some monies in Roths over the years but to be honest, I never trusted that DC would not try to tax the gains down the road.

 

[QueenIsabella]

My IRAs are all traditional. My Financial Planner and CPA all crunched the numbers on rolling them into Roths and the tax burden was staggering. As for opening a new IRA, I think you really have to look at tax situation to decide if you should go with a Roth or a traditional. My daughter opened a Roth because at her income level, with a mortgage, there was little tax benefit to a traditional. But she is losing out on the compounding of the money she spent on taxes.
For my wife and I, our retirement plan was centered on reducing taxes while we were working, and paying taxes in retirement when we expected to be.......and are....in a much lower tax bracket. Hopefully, we won't start RMDs until age 72, we are both 66, so that is another six years of compounding.

For young adults, Roth is usually a no-brainer. The reason DS18's Roth is so (comparatively) small is that he's 18 and works part time. Similarly, his sister is 21 and works at Starbucks. She puts 10% of her salary (20 hours a week during school, more in summer) in a Roth 401k. Company match goes in regular 401k. She's got ~$20k in there as of now, and it's been painless for her (another good financial lesson).


We also looked at Roths, and like you, conversions don't make sense for our overall financial picture. I know DH has a small one--maybe $40-50k, but we don't add to it (or tap it).

 

[QueenIsabella]

Can I ask if you are still working and if not, what are you living off of while you wait to take RMD's?

We have taken the same approach as you - reduce taxes while working - so we don't have much in Roths. Coincidentally, we were just debating whether we should max out a Roth 401k over our last few years of working, that way, we would delay hitting up our traditional IRSs/401ks and paying taxes on those withdrawals.

Now I also question if I made a mistake not putting some monies in Roths over the years but to be honest, I never trusted that DC would not try to tax the gains down the road.

I'm with you on the concerns of the government taxing Roth withdrawals down the road. Has anybody, EVER known the government to look at a tax-free pile of cash, and not wants some? Our financial advisors are of the mindset that, even if they did, they'd only tax earnings, since the base contribution was after-tax.

The other thing we look at is, we over-saved. Not a bad place to be generally, but we're looking a future RMDs, and they'll be painful, tax-wise. Right now, DH is 61, so we have some time, but not a lot before RMDs start.

 

[wabbott]

Now I also question if I made a mistake not putting some monies in Roths over the years but to be honest, I never trusted that DC would not try to tax the gains down the road.

That fear was always what kept me away from Roths. However, a mix of Roths during the last few years of working does seem like a sound move today. If there is any serious future plan by FedGov to tax withdrawals, it likely would take several years of lobbying and PR by the proponents to implement. That would probably give you time to deplete those accounts first.

IMO, that is why you are seeing articles and opinion pieces that suggest unrealized capital gains should be taxed. Governments, at all levels, are looking at IRA/401K balances that are held by savers, and licking their chops.

 

[GAN]

The likelihood of future tax impact on existing Roth funds is as close to zero as you could get ....which Party is going to support that move? I could see a change impacting future Roth deposits at some point. The thing I like about a Roth is you can build a savings, while enjoying all the gains tax-free. The other benefit is that when I die, I can pass it on to my two daughters and they can access it tax-free(for now anyway). If all my money was in a 401k -anything left for them is going to be taxed at their rate and they'll have to spend through it in 10-years. My parents are in their 90's and I know they have a significant amount of money that they'll never use -they live off social security and gains. In fact, they are forced to take out the RMD's and end up passing the extra to my sister and I ...which I use to fund my Roth. So, I haven't been taxed at all on my Roth and never will be.

 

[wabbott]

The likelihood of future tax impact on existing Roth funds is as close to zero as you could get ....which Party is going to support that move? I could see a change impacting future Roth deposits at some point. The thing I like about a Roth is you can build a savings, while enjoying all the gains tax-free. The other benefit is that when I die, I can pass it on to my two daughters and they can access it tax-free(for now anyway). If all my money was in a 401k -anything left for them is going to be taxed at their rate and they'll have to spend through it in 10-years. My parents are in their 90's and I know they have a significant amount of money that they'll never use -they live off social security and gains. In fact, they are forced to take out the RMD's and end up passing the extra to my sister and I ...which I use to fund my Roth. So, I haven't been taxed at all on my Roth and never will be.

You have a very valid argument. But the history of tax policy is fraught with examples of things that were "never going to happen."

When the 16th Amendment was ratified, income only above $3,000/year ($4000/yr for couples) was taxed at a rate of 1%. At $50,000 year, it went to %2. Only about 3% of the population was subject to an income tax. How did that all work out?

https://en.wikipedia.org/wiki/Revenue_Act_of_1913

Until 1984, Social Security benefits weren't taxable. That sure changed.

The only constant thing about taxes, at ALL levels of government, is that it will change. Now I'm not saying Roth withdrawals WILL be taxed in the future. But it sure can happen, if history is any teacher. Never is a very long time.

 

[GAN]

You have a very valid argument. But the history of tax policy is fraught with examples of things that were "never going to happen."

When the 16th Amendment was ratified, income only above $3,000/year ($4000/yr for couples) was taxed at a rate of 1%. At $50,000 year, it went to %2. Only about 3% of the population was subject to an income tax. How did that all work out?

https://en.wikipedia.org/wiki/Revenue_Act_of_1913

Until 1984, Social Security benefits weren't taxable. That sure changed.

The only constant thing about taxes, at ALL levels of government, is that it will change. Now I'm not saying Roth withdrawals WILL be taxed in the future. But it sure can happen, if history is any teacher. Never is a very long time.

Sure ...but SS is slightly different than money, already taxed, placed into a Roth. You'd need a really long arm to reach that prediction! We're going to tax you on the way in AND on the way out ...even though we said we wouldn't. Possibly on your gains -that is realistic, but would also be the end of Roth's as we have now.

 

[RivShore]

The likelihood of future tax impact on existing Roth funds is as close to zero as you could get ....which Party is going to support that move?

Agreed that this is not happening anytime soon but, to answer your question, which party will support it - whichever party wants to pander and buy votes from the 70 sum percent of voters who don't have Roths. I've got the pitch right here - "We can fix SS tomorrow, we just need to tax Roths and those of you who are struggling to survive on SS without any retirement savings, will be swimming in dough!" What SS recipient is not voting for that!!

 

[GAN]

Agreed that this is not happening anytime soon but, to answer your question, which party will support it - whichever party wants to pander and buy votes from the 70 sum percent of voters who don't have Roths. I've got the pitch right here - "We can fix SS tomorrow, we just need to tax Roths and those of you who are struggling to survive on SS without any retirement savings, will be swimming in dough!" What SS recipient is not voting for that!!

Still not going to be enough to "save" SS. If you're MAGI is $160k ($240k joint) you can't even contribute -that along with annual maximums and the income generated would be minimal compared to what it takes to support 70% of the nations seniors. EVERYONE gets a $0.10 increase!!

 

[RivShore]

Possibly on your gains

That is all I would expect. If they were to go after it all, the double taxation aspect of it would be quickly stopped in court...I would hope.

 

[RivShore]

Still not going to be enough to "save" SS. If you're MAGI is $160k ($240k joint) you can't even contribute -that along with annual maximums and the income generated would be minimal compared to what it takes to support 70% of the nations seniors. EVERYONE gets a $0.10 increase!!

Are you saying that a politician would not expand the truth (LIE) about it saving SS? ...if their lips are moving...

 

[GAN]

Are you saying that a politician would not expand the truth (LIE) about it saving SS? ...if their lips are moving...

Okay ...you win!

 

[wabbott]

https://www.forbes.com/quotes/3418/

A government which robs Peter to pay Paul can always count on Paul’s support - George Bernard Shaw

 

[tvguy]

Can I ask if you are still working and if not, what are you living off of while you wait to take RMD's?

We have taken the same approach as you - reduce taxes while working - so we don't have much in Roths. Coincidentally, we were just debating whether we should max out a Roth 401k over our last few years of working, that way, we would delay hitting up our traditional IRSs/401ks and paying taxes on those withdrawals.

Now I also question if I made a mistake not putting some monies in Roths over the years but to be honest, I never trusted that DC would not try to tax the gains down the road.

I am not working. Lived entirely off savings from July 2021 until January of 2024 when I reached full SS retirement age and started getting benefits. First year was tight for sure, but we made it work. First year we were paying $1,300 a month for COBRA health coverage. When we went on Medicare in 2022 our medical premiums dropped to $650 a month for Part B, a top of the line Medigap supplement, medical, dental and vision. That $650 a month savings bought a lot of breathing room. Paid off our car in February 2024, that freed up $500. My wife went back to work part time temporarily, that brings in $1,600 a month but that temporary job ends in a couple of months, and she goes on SS next month.
But we planned for this. And our SS benefits will be exactly what we were bringing home working. Lower tax bracket, not putting money in a 401k anymore so our Net income we be the same, while our Gross income has dropped. We have a non-IRA annuity that starts paying in July so we will have more to spend each month than we did working. My IRAs.....where I rolled my 401k money, and my wife's IRAs, also where her 401k money went will be backup but the hope is not to touch them until the law requires us to make withdrawals.
I do have one other source of income. When my mom started her mandatory IRA withdrawals at age 70 in 1993 she was allowed to average in my life expectancy to reduce the amount she was legally required to take out. Doing that gave me the option when she passed away to either cash in that IRA, or continue those distributions. I opted to continue the distributions and that gives me about $3,000 a year that I use to pay for my Long Term Care Insurance.. Thanks mom. They changed the law so you can't do that anymore, beneficiaries now must withdraw all the money any way they want, lump sum, or a little at a time, but it has to be completely withdrawn within 10 years of the death of the account holder.

 

[FreckledOne]

I've got the pitch right here - "We can fix SS tomorrow, we just need to tax Roths and those of you who are struggling to survive on SS without any retirement savings, will be swimming in dough!" What

This would be a nightmare. I already paid taxes and using MY disposable post-tax money to fund my Roth. I have sympathy for those retirees who are struggling on SS, but my retirement money is to help sustain me and my spouse in our old age, not others. If you fail to plan, you plan to fail.

 

[wabbott]

This would be a nightmare. I already paid taxes and using MY disposable post-tax money to fund my Roth. I have sympathy for those retirees who are struggling on SS, but my retirement money is to help sustain me and my spouse in our old age, not others. If you fail to plan, you plan to fail.

Almost 3 thousand years ago, a Greek storyteller related something about this. Something about an ant and a grasshopper.

 

[wabbott]

@FreckledOne, did you figure out how to do your quarterly payments ok, and make a somewhat reliable estimate of your expected income? That was one of your initial issues when you started the thread.