2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

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Matt212
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2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Matt212 »

Hello, All:

Background: In 2019 my mother suffered both an injury and cognitive decline and eventually had to have 24 hour care. Shortly after this event, I was informed that my brother had embezzled in excesss of 3 million dollars in family funds from ILIT, mutual accounts, proceeds of sale of my mother's last apartment and bank accounts.
Before this time I had had no idea of the extent of my family's assets, where the assets were held or how invested or in some cases that that they existed. After a somewhat wild ride with banks, brokers and insurers [my brother was disinherited - and I had to navigate only on basis of a Power of Attorney]: my mother then passed away in June, 2020 and her Estate of approximately 5.5 million was divided among my two sisters and myself. The Estate has now closed and one year has passed.

I am seeking financial advice - not as to above Estate issues - but only with respect to my own personal current retirement and tax situation [post-Windfall] and how to best plan for my own retirement and to preserve my assets for my two adult daughters. My own financial details are below.

I am a first time poster who has received a Windfall [inheritance] in the form of a Post Secure Act tIRA of which I am the adult son/heir [my mother died June, 2020 - and no distribution was taken in 2020] that has a current value of $850,000 and a Taxable Account that has a value of $970,000.

Both are currently invested aggressively at 70-80% with a legacy Wealth Management firm that has an AUM of .85%

The two accounts in both cases are composed of about 30 large cap stocks and the account states that its benchmark is the S&P 500. The taxable account has about 30% in municipal bonds [half in an Ishares national muni fund and half in the bonds of various towns in my state [NY]

My first question is that if my mother died in June 2020 and had not taken a distribution from the IRA and no other distribution was taken from the IRA in 2020 pursuant to CARES Act: how many years are left to distribute the inherited tIRA and what is the final year: 2031?

And my overall objective *with all questions below* : is how to make the most tax efficient use of the inherited post secure act tIRA and my goal with both the tIRA and the taxable account is to preserve the assets in this for my two adult daughters [late 20s].

I have read both the Bogglehead's Windfall Guide and the Stretch IRA information on Post Secure Act non-spouse beneficiaries: but it is not clear to me whether or not to try to invest the tIRA aggressively for 10 years and pay fed and state taxes at end- or - to slowly sell it off each year [after reading the discussion in Stretch IRA]:

Age: 61

Expected Age of retirement: 70-71 [ten years from now: 2021]

Annual Salary: $75,000

Current Fed tax rate: 22% and very high New York State and New York City rates of approx 11% combined tax burden equals: 33%

Note: that it is possible that in the year of retirement at age 71 [but not before that date: 2031] that I may move to a no state income tax state [NH] or a *relatively* lower tax state [Me or Ma] that might provide an argument for distributing the IRA at my simultaneous end of the 10 year period [2031]

Personal assets: I very much wish to work until age 70-71and intend to do so. Job is secure and there will be no signifiant changes in year to year annual income as NYC civil servant [a librarian]

I have a New York State Employee defined benefit pension [and this is in secure job and [*relatively* well funded] NY State pension that will provide at age 71 [in ten years]: $3,127month or $37,524 a year.

And:

My social Social Security at age 70: $3,350 month or $40,200 a year.

I also have a very modest personal Vanguard Roth of approximately $15,000 [opened 2020] that I will make the maximum contribution to until retirement 2031 in an Vanguard VASGX 80/20 fund.

Note: the NY State Pension and SS: will exceed my needs and cover my monthy estimated costs of living in retirement [exclusive of late retirement issues and long term care for which I may need for some of the inherited accounts]

My own personal financial situation: I very much regret that I am possibly the oldest person to ever become interested my own retirement but I have spent many months now reading the 3 Bogleheads books as well as Eric Tyson [and a number of your other recommended books] as well as posts on this forum. I very much respect the views of this Forum and now wish to take action.

I am currently have an after tax employment income of about $3,750 a month. My [for my situation: inordinately expensive] Manhattan apartment rent is $2,000 a month [this lease expires March 2022]  Psychotherapy after insurance payment is $400 and utilities, etc cost several hundred more. I do not own a car and have no credit card debt. I do have about $10,000 [3 months EF] in a savings account. My primary leisure activity is: reading. Until less than two years ago [age 59 at that time] I never had a budget or a retirement plan: of any kind. I am not proud of this and am a late convert but I have found: the Boglhead Religion. I also need a good budgeting App.

Note: I may have the ability to return to living with my former wife in a cooperative apartment that we jointly own on the expiration of the expensive apartment lease [see below]

Q1): I very much regret that I have never contributed to my employer's two offered 457 plans at all. Note: unfortunately, these are tax defered annuities offered either from the TIAA and Voya family of funds. These are available - but - it would not be possible for me to invest in them in a meaningful way in the next 10 years: without using the funds from one or the other of the two inherited accounts above: and I am willing to do this if a good idea. I would appreciate any advise on how to fund this from tIRA or from taxable account . Again: I would like to leave as much of the tIRA [after conversion to taxable] and the taxable accounts as an inheritance to my adult daughters?

Note: Neither of my two adult daughters in 20s is able to fully fund a Roth IRA [and I could fund their Roth IRAs if that would be a good way - to use the after tax proceeds of Inherited tIRA]

Note: that it is possible that [[per wishes of ex wife who I may move back in with] in the year of retirement at age 70-71 [not before then] that we may move in retirement to a no state income tax state [NH] or *relatively* lower tax state [Me or Ma] that might provide an argument for distributing the IRA at my simultaneous end of the 10 year period [2031]

Q2) My own strong bias [due to a desire to see the money grow] is to simply leave the inherited post Secure Act tIRA in its account at 80/20 equities/debt and pay the full tax due  in year 10 even though at the maximum fed and State rates: but if there is a strong tax reason [if more than $100,000] to pay the taxes in chunks over the 10 year period then I am open to that. Opinions?

Q3) As to the taxable account also at 80/20 equities/debt: I assume that this should just be let to grow for the next 10 years  [and  as long as possible beyond that date - unless needed for LTC etc] and pay taxes on it. I assume that members of this Forum that  the .85% AUM in legacy wealth management firm should be replaced with Vanguard 3 Fund [or similar] program. If one assumes for this hypothetical question, that the IRA and the Taxable Account are $1m each at this time, then the cost savings [on each account - each year] to move to would be: quite considerable over 10 years [and likely much more]. Can someone provide a simple demonstration or a link to calculator or estimate of what these AUM saving would be - with or without - VPAS?

Q4) As to personal residence: At expiration of lease on rental apartment [at $2,000 mth] in March, 2022 , if possible [and for entirely non-economic reasons], I would like to move into the an apartment in Manhattan that I jointly own with ex-wife [with whom I have an excellent relationship since divorce over 13 years ago but have recently discussed moving in with and ultimately re-marriage]. This apartment is valued at 1.2m and it is almost mortgage free. I also wish to leave this to her as personal residence unless she predeceases me.

**If this move in to jointly owned apartment with former spouse is not feasible [for any reason] then I think it would be prudent to purchase my own apartment for approximately $100,000 [in a much lower COLA than my current leased apt] and commute to work in order to save more from my salary toward work place retirement plans and Investments. I assume that 1) This such a purchase of a lower cost apartment is a financially prudent move and that, if so, should I withdraw the funds from the tIRA or the taxable account to pay for it?

Q5) In the remainder of the current year [2021] should I start the distribution of the tIRA [rather than the taxable account] to start funding my employer based retirement 457 accounts [deferred annuities from TIAA or Voya] -rather than - wait until March 2022 for possible move in with DW or for my alternative purchase of small apartment in a lower COLA?

Q6) I would also like a recommendation for an hourly based financial planner and tax consultant who is consistent with Boglehead principles as I am aware that there are many variables here

Any suggestions - as to any of questions or points above - are welcome.

Many thanks!
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David Jay
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by David Jay »

Welcome to the forum!

I’ll take on a couple of your questions:
Matt212 wrote: Thu Sep 02, 2021 12:01 pmNeither of my two adult daughters in 20s is able to fully fund a Roth IRA [and I could fund their Roth IRAs if that would be a good way - to use the after tax proceeds of Inherited tIRA].
I think this is a great idea, assuming that they are both employed and earning more than $6000 a year. I do something similar, gifting each year and “recommending” that they put the gifts into their Roth accounts.
Matt212 wrote: Thu Sep 02, 2021 12:01 pm Q2) My own strong bias [due to a desire to see the money grow] is to simply leave the inherited post Secure Act tIRA in its account at 80/20 equities/debt and pay the full tax due  in year 10 even though at the maximum fed and State rates: but if there is a strong tax reason [if more than $100,000] to pay the taxes in chunks over the 10 year period then I am open to that. Opinions?
In contrast, this is a bad idea. Spreading the withdrawals out over 10 years will keep far more money in your portfolio.

It seems like growing the “bigger” pre-tax amount is better than paying taxes and growing a “smaller” amount but this is a cognitive error that is human beings have from time-to-time. The math (commutative property) says that the determining factor is the tax rate paid. Spreading the distributions out over 10 years will lower your tax rate and put more money in your pocket.

Here is an example of one year’s distribution (10% of $850,000), taking the money out immediately versus leaving it in for 10 years. I will use 8% growth in the example. If the tax rate is the same (let’s say 22%, a likely federal tax rate) then the result is the same. A higher or lower tax rate is the only thing that changes the equation:

85,000 x .78 (22% tax) x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 = 143,137

85,000 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x .78 (22% tax) = 143,137

Now, to show the result if you wait, assuming pay 37% federal tax at the end of 10 years, here is the result:

85,000 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08 x .63 (37% tax) = 115,610
Last edited by David Jay on Thu Sep 02, 2021 1:15 pm, edited 2 times in total.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
JBTX
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by JBTX »

Matt212 wrote: Thu Sep 02, 2021 12:01 pm Hello, All:

Background: In 2019 my mother suffered both an injury and cognitive decline and eventually had to have 24 hour care. Shortly after this event, I was informed that my brother had embezzled in excesss of 3 million dollars in family funds from ILIT, mutual accounts, proceeds of sale of my mother's last apartment and bank accounts.
Before this time I had had no idea of the extent of my family's assets, where the assets were held or how invested or in some cases that that they existed. After a somewhat wild ride with banks, brokers and insurers [my brother was disinherited - and I had to navigate only on basis of a Power of Attorney]: my mother then passed away in June, 2020 and her Estate of approximately 5.5 million was divided among my two sisters and myself. The Estate has now closed and one year has passed.

I am seeking financial advice - not as to above Estate issues - but only with respect to my own personal current retirement and tax situation [post-Windfall] and how to best plan for my own retirement and to preserve my assets for my two adult daughters. My own financial details are below.

I am a first time poster who has received a Windfall [inheritance] in the form of a Post Secure Act tIRA of which I am the adult son/heir [my mother died June, 2020 - and no distribution was taken in 2020] that has a current value of $850,000 and a Taxable Account that has a value of $970,000.

Both are currently invested aggressively at 70-80% with a legacy Wealth Management firm that has an AUM of .85%

The two accounts in both cases are composed of about 30 large cap stocks and the account states that its benchmark is the S&P 500. The taxable account has about 30% in municipal bonds [half in an Ishares national muni fund and half in the bonds of various towns in my state [NY]

My first question is that if my mother died in June 2020 and had not taken a distribution from the IRA and no other distribution was taken from the IRA in 2020 pursuant to CARES Act: how many years are left to distribute the inherited tIRA and what is the final year: 2031?

And my overall objective *with all questions below* : is how to make the most tax efficient use of the inherited post secure act tIRA and my goal with both the tIRA and the taxable account is to preserve the assets in this for my two adult daughters [late 20s].

I have read both the Bogglehead's Windfall Guide and the Stretch IRA information on Post Secure Act non-spouse beneficiaries: but it is not clear to me whether or not to try to invest the tIRA aggressively for 10 years and pay fed and state taxes at end- or - to slowly sell it off each year [after reading the discussion in Stretch IRA]:

Age: 61

Expected Age of retirement: 70-71 [ten years from now: 2021]

Annual Salary: $75,000

Current Fed tax rate: 22% and very high New York State and New York City rates of approx 11% combined tax burden equals: 33%

Note: that it is possible that in the year of retirement at age 71 [but not before that date: 2031] that I may move to a no state income tax state [NH] or a *relatively* lower tax state [Me or Ma] that might provide an argument for distributing the IRA at my simultaneous end of the 10 year period [2031]

Personal assets: I very much wish to work until age 70-71and intend to do so. Job is secure and there will be no signifiant changes in year to year annual income as NYC civil servant [a librarian]

I have a New York State Employee defined benefit pension [and this is in secure job and [*relatively* well funded] NY State pension that will provide at age 71 [in ten years]: $3,127month or $37,524 a year.

And:

My social Social Security at age 70: $3,350 month or $40,200 a year.

I also have a very modest personal Vanguard Roth of approximately $15,000 [opened 2020] that I will make the maximum contribution to until retirement 2031 in an Vanguard VASGX 80/20 fund.

Note: the NY State Pension and SS: will exceed my needs and cover my monthy estimated costs of living in retirement [exclusive of late retirement issues and long term care for which I may need for some of the inherited accounts]

My own personal financial situation: I very much regret that I am possibly the oldest person to ever become interested my own retirement but I have spent many months now reading the 3 Bogleheads books as well as Eric Tyson [and a number of your other recommended books] as well as posts on this forum. I very much respect the views of this Forum and now wish to take action.

I am currently have an after tax employment income of about $3,750 a month. My [for my situation: inordinately expensive] Manhattan apartment rent is $2,000 a month [this lease expires March 2022]  Psychotherapy after insurance payment is $400 and utilities, etc cost several hundred more. I do not own a car and have no credit card debt. I do have about $10,000 [3 months EF] in a savings account. My primary leisure activity is: reading. Until less than two years ago [age 59 at that time] I never had a budget or a retirement plan: of any kind. I am not proud of this and am a late convert but I have found: the Boglhead Religion. I also need a good budgeting App.

Note: I may have the ability to return to living with my former wife in a cooperative apartment that we jointly own on the expiration of the expensive apartment lease [see below]

Q1): I very much regret that I have never contributed to my employer's two offered 457 plans at all. Note: unfortunately, these are tax defered annuities offered either from the TIAA and Voya family of funds. These are available - but - it would not be possible for me to invest in them in a meaningful way in the next 10 years: without using the funds from one or the other of the two inherited accounts above: and I am willing to do this if a good idea. I would appreciate any advise on how to fund this from tIRA or from taxable account . Again: I would like to leave as much of the tIRA [after conversion to taxable] and the taxable accounts as an inheritance to my adult daughters?
This is a pretty meaty post. My ability to help is probably limited.

As to partially liquidating your inherited taxable account or inherited IRA to fund your 457, you are essentially talking about recognizing potential taxable gains now, or realized distributed ira income that is taxable, and putting it into a 457. It gets down to what your tax rate is now vs the future. It sounds like your rate now is likely higher than your future rate. Probably doesn't make sense to partially liquidate IRA to fund 457. . Rethinking this, taking money out of ira is taxable, but putting it in 457 should be tax deferral, so they should offset. As such you are deferring recognition to the future, when your tax rate will likely be lower which on the surface makes sense. As to capital gains, it depends. If you can offset some capital gains and losses, or the capital gains are modest, then that may make sense. It also depends if you plan to leave money with advisor or liquidate it and pay cap gains taxes to vanguard PAS.
Note: Neither of my two adult daughters in 20s is able to fully fund a Roth IRA [and I could fund their Roth IRAs if that would be a good way - to use the after tax proceeds of Inherited tIRA]
You may want to evaluate whether you want money to pass to daughters as is or in trust. In trust provides greater protections, but also has higher trust tax rates. It really depends on their level of financial literacy and stability, as well as their marital stability.


Edit: funding kids Roth IRA is a good idea. Liquidating an IRA at a marginal rate of 33% to fund may or may not be. Doing it with the taxable proceeds with little or no capital gains may be better, especially if it is the bond partion. Again a lot of moving parts.

Note: that it is possible that [[per wishes of ex wife who I may move back in with] in the year of retirement at age 70-71 [not before then] that we may move in retirement to a no state income tax state [NH] or *relatively* lower tax state [Me or Ma] that might provide an argument for distributing the IRA at my simultaneous end of the 10 year period [2031]

Q2) My own strong bias [due to a desire to see the money grow] is to simply leave the inherited post Secure Act tIRA in its account at 80/20 equities/debt and pay the full tax due  in year 10 even though at the maximum fed and State rates: but if there is a strong tax reason [if more than $100,000] to pay the taxes in chunks over the 10 year period then I am open to that. Opinions?

Kind of hard to predict but if you expect your tax rate to be lower in future probably better to sit on it, but recognizing it all at once may drive it up anyway. Partially depends on what state you live in. It doesn't seem like recognizing it now at your tax rate makes sense, unless you do as q1 and use that to fund 457. Now whether you recognize it all at the end, or over last few years depends on various factors of your marginal rates at the time. If you do get married in the future depending on income your tax rate may go down if married filing jointly.

Q3) As to the taxable account also at 80/20 equities/debt: I assume that this should just be let to grow for the next 10 years  [and  as long as possible beyond that date - unless needed for LTC etc] and pay taxes on it. I assume that members of this Forum that  the .85% AUM in legacy wealth management firm should be replaced with Vanguard 3 Fund [or similar] program. If one assumes for this hypothetical question, that the IRA and the Taxable Account are $1m each at this time, then the cost savings [on each account - each year] to move to would be: quite considerable over 10 years [and likely much more]. Can someone provide a simple demonstration or a link to calculator or estimate of what these AUM saving would be - with or without - VPAS?
The ten year secure act window only applies to IRAs, Roths and other "qualified" assets like 401ks. It doesn't apply to taxable assets. So you have to balance recognition of capital gains vs the desire to move it to PAS or elsewhere. It's impossible to tell you what to do here. My guess is to move the bonds since they are mostly taxable income, selectively offset capital gains and capital losses and move those, and then via tax planning decide how much if any of the rest you wish to move going forward year by year. I think PAS is 0.3%, so that would be 0.55% saved every year, or $5,500 out of every $1 million each year.
Q4) As to personal residence: At expiration of lease on rental apartment [at $2,000 mth] in March, 2022 , if possible [and for entirely non-economic reasons], I would like to move into the an apartment in Manhattan that I jointly own with ex-wife [with whom I have an excellent relationship since divorce over 13 years ago but have recently discussed moving in with and ultimately re-marriage]. This apartment is valued at 1.2m and it is almost mortgage free. I also wish to leave this to her as personal residence unless she predeceases me.
Having a jointly owned asset with a non spouse seems like a bad idea, especially one you've already divorced once.
**If this move in to jointly owned apartment with former spouse is not feasible [for any reason] then I think it would be prudent to purchase my own apartment for approximately $100,000 [in a much lower COLA than my current leased apt] and commute to work in order to save more from my salary toward work place retirement plans and Investments. I assume that 1) This such a purchase of a lower cost apartment is a financially prudent move and that, if so, should I withdraw the funds from the tIRA or the taxable account to pay for it?
That's impossible for me to say. Having to balance commute time and expense, quality of life and housing costs. That's a personal decision.
Q5) In the remainder of the current year [2021] should I start the distribution of the tIRA [rather than the taxable account] to start funding my employer based retirement 457 accounts [deferred annuities from TIAA or Voya] -rather than - wait until March 2022 for possible move in with DW or for my alternative purchase of small apartment in a lower COLA?
While it seems like a good idea to fund 457 with inherited IRA liquidations, I'd really advise having someone qualified to look at the totality of your situation to help with that decision.
Q6) I would also like a recommendation for an hourly based financial planner and tax consultant who is consistent with Boglehead principles as I am aware that there are many variables here

Any suggestions - as to any of questions or points above - are welcome.

Many thanks!

I don't have any recommendations but hopefully someone can steer you in the right direction.

Good luck
Last edited by JBTX on Thu Sep 02, 2021 1:10 pm, edited 2 times in total.
JBTX
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by JBTX »

David Jay wrote: Thu Sep 02, 2021 12:54 pm Welcome to the forum!

I’ll take on a couple of your questions:
Matt212 wrote: Thu Sep 02, 2021 12:01 pmNeither of my two adult daughters in 20s is able to fully fund a Roth IRA [and I could fund their Roth IRAs if that would be a good way - to use the after tax proceeds of Inherited tIRA].
I think this is a great idea, assuming that they are both employed and earning more than $6000 a year. I do something similar, gifting each year and “recommending” that they put the gifts into their Roth accounts.
Matt212 wrote: Thu Sep 02, 2021 12:01 pm Q2) My own strong bias [due to a desire to see the money grow] is to simply leave the inherited post Secure Act tIRA in its account at 80/20 equities/debt and pay the full tax due  in year 10 even though at the maximum fed and State rates: but if there is a strong tax reason [if more than $100,000] to pay the taxes in chunks over the 10 year period then I am open to that. Opinions?
In contrast, this is a bad idea. Spreading the withdrawals out over 10 years will keep far more money in your portfolio.

It seems like growing the “bigger” pre-tax amount is better than paying taxes and growing a “smaller” amount but this is a cognitive error that human beings often have. The math (commutative property) says that the determining factor is the tax rate paid. Spreading the distributions out over 10 years will lower your tax rate and put more money in your pocket.
Keep in mind on your last point, his current tax rate is 33%, he eventually will retire, he may move to a lower tax state and may get married. There are a lot of moving parts there.
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David Jay
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by David Jay »

JBTX wrote: Thu Sep 02, 2021 1:04 pmKeep in mind on your last point, his current tax rate is 33%, he eventually will retire, he may move to a lower tax state and may get married. There are a lot of moving parts there.
Tax brackets are 22% federal and 11% state/local. At $1M+ with future growth (at 8% it is over $1.8M), MFJ will still be max bracket (scheduled to be 39.6% beginning in 2026). Moving to a no income tax state will not overcome the difference in federal tax.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
JBTX
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by JBTX »

David Jay wrote: Thu Sep 02, 2021 1:24 pm
JBTX wrote: Thu Sep 02, 2021 1:04 pmKeep in mind on your last point, his current tax rate is 33%, he eventually will retire, he may move to a lower tax state and may get married. There are a lot of moving parts there.
Tax brackets are 22% federal and 11% state/local. At $1M+ with future growth (at 8% it is over $1.8M), MFJ will still be max bracket (scheduled to be 39.6% beginning in 2026). Moving to a no income tax state will not overcome the difference in federal tax.
Yeah I wasn't suggesting taking it all the last year, but even so, given the size, you definitely want spread it out. Plus factoring in growth you still may end up with more recognition on back end.

https://taxfoundation.org/2021-tax-brackets/

Probably want to stay under the 32% federal bracket.
retire2022
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by retire2022 »

Op

My condolences on your mother's passing.

I am 61, former NYC/NYS Civil servant, and recent retiree, if you are fully vested, if I were in your shoes, I would retire, and do something fulfilling.

Please read this link on managing a windfall.

https://www.bogleheads.org/wiki/Managing_a_windfall
Topic Author
Matt212
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Matt212 »

JBTX wrote: Thu Sep 02, 2021 3:24 pm
David Jay wrote: Thu Sep 02, 2021 1:24 pm
JBTX wrote: Thu Sep 02, 2021 1:04 pmKeep in mind on your last point, his current tax rate is 33%, he eventually will retire, he may move to a lower tax state and may get married. There are a lot of moving parts there.
Tax brackets are 22% federal and 11% state/local. At $1M+ with future growth (at 8% it is over $1.8M), MFJ will still be max bracket (scheduled to be 39.6% beginning in 2026). Moving to a no income tax state will not overcome the difference in federal tax.
Yeah I wasn't suggesting taking it all the last year, but even so, given the size, you definitely want spread it out. Plus factoring in growth you still may end up with more recognition on back end.

https://taxfoundation.org/2021-tax-brackets/

Probably want to stay under the 32% federal bracket.
David Jay and JBTX:

I want to thank both of you - very much -for responding to my post - and please know that all these responses are deeply appreciated and that you both provide a real public service!

I also had to read both your responses several times as I am not as tax savvy as I should be: and my questions are shot through with tax implications. I also had to consult posting rules as I have not posted on this forum before.

David Jay: Thank you for taking just - one year's worth of one tenth the value of the Post Secure Act inherited tIRA - at my current income tax rate versus paying in a lump sum in year 10 at highest rate: was a real eye opener!

JBTX and David Jay: Many thanks and I am fully aware that there are many "Moving Parts" to my questions that make it more difficult to answer.

Q1); But you are both - agreed on the conclusion - that whether I do or do not reunite with former spouse and end up MFJ - OR - later move to a state with a lower or no state income tax: this inherited tIRA should be liquidated gradually [over each of the 10 years -as per David Jay's post] while I am in a combined federal and state bracket of: 33% rather than waiting for the expiration of the 10 years and liquidating at the likely much higher post 2026 bracket of likely: 39% [plus possible state income tax]?

Q2) It would seem that a central tenant of Boglehead thinking is to move one' s funds from the taxable to [at least] a tax deferred space. I fully intend to continue to work with same employer the next 10 years and my employment income will not fluctuate and I am over age 50 and am able to contribute approx. $25,000 a year to retirement plan. Therefore in response to JBTX'S comment: "Rethinking this, taking money out of ira is taxable, but putting it in 457 should be tax deferral, so they should offset. As such you are deferring recognition to the future, when your tax rate will likely be lower which on the surface makes sense" and JBTX's conclusion that: "While it seems like a good idea to fund 457 with inherited IRA liquidations, I'd really advise having someone qualified to look at the totality of your situation to help with that decision."

This question - to move the funds from the inherited IRA to a tax deferred work place retirement account - is the first and most significant question that I am facing.

[I am sure that I cannot simply withdraw $25,000 a year from the tIRA and arrange for my employer's HR to withdraw this same amount from my paycheck: to achieve a tax wash.]

I assume that you are suggesting a CPA and/or Financial Planner [or some other method] to achieve this? Does any one on the forum have any suggestions as to someone or something that they might recommend ?

Q3) As to funding two Roth Accounts for my two adult daughters in their late 20' [over a course of many years]I would also very much to fund this from distributions from the inherited tIRA [I assume that this - as with funding my employer's 457 plan in my Q1- is whether the inherited tIRA or the taxable account is the better source of funding. If so, and it seems to me the inherited tIRA is the likely source of the funds, how much of the tIRA to tIRA to liquiduate and pay taxes each year?

As to JBTX' s comment: "you may want to evaluate whether you want money to pass to daughters as is or in trust. In trust provides greater protections, but also has higher trust tax rates. It really depends on their level of financial literacy and stability, as well as their marital stability.- funding kids Roth IRA is a good idea. "

Fortunately, my two daughters financial and emotional literacy and stability is fine and I would therefore much prefer funding two Roths for them rather than using a trust with its associated - very high - trust rates of taxation. But: I would also strongly suggest to my daughters that they later use a pre-nuptial agreement when/if they ever think of marriage limiting assets available in event of divorce to those "earned by own efforts... during the marriage" [or similar or even more comprehensive language].

Q4) As to my question as to the legacy wealth management firm currently managing my assets with the .85% AUM and possible conversion to Vanguard PAS. Thank you for the suggestion that if we slightly round up the value the inherited IRA to 1M and the taxable account to 1m: that PAS would represent a savings for .55% a year on each of these two accounts. I saw the link below referred to as useful to calculating the cost of wealth management AUMS versus indexing and DYI:

https://www.begintoinvest.com/expense-ratio-calculator/

-Are there other links [or other resources] that might be helpful in making similar comparisons?

Q5) AS to moving into apartment jointly owned by ex-spouse in March 2022 when my current high cost rental lease expires - OR -if this does not work out [for any reason] then purchasing an apartment of my own for $100,000 in lower COLA - it does seem to accord with all that I have read on this forum as I would seek to invest in tax advantaged accounts [or otherwise] any savings. The extra commutation time would be on a train and would not be burdensome. Any comments on this by anyone on forum on this course of actionare welcome

Any further thoughts on any parts of the above are most appreciate. *My deepest thanks to any who have responded*

Thank you!
JBTX
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by JBTX »

Matt212 wrote: Fri Sep 03, 2021 3:20 pm
JBTX wrote: Thu Sep 02, 2021 3:24 pm
David Jay wrote: Thu Sep 02, 2021 1:24 pm
JBTX wrote: Thu Sep 02, 2021 1:04 pmKeep in mind on your last point, his current tax rate is 33%, he eventually will retire, he may move to a lower tax state and may get married. There are a lot of moving parts there.
Tax brackets are 22% federal and 11% state/local. At $1M+ with future growth (at 8% it is over $1.8M), MFJ will still be max bracket (scheduled to be 39.6% beginning in 2026). Moving to a no income tax state will not overcome the difference in federal tax.
Yeah I wasn't suggesting taking it all the last year, but even so, given the size, you definitely want spread it out. Plus factoring in growth you still may end up with more recognition on back end.

https://taxfoundation.org/2021-tax-brackets/

Probably want to stay under the 32% federal bracket.
David Jay and JBTX:

I want to thank both of you - very much -for responding to my post - and please know that all these responses are deeply appreciated and that you both provide a real public service!

I also had to read both your responses several times as I am not as tax savvy as I should be: and my questions are shot through with tax implications. I also had to consult posting rules as I have not posted on this forum before.

David Jay: Thank you for taking just - one year's worth of one tenth the value of the Post Secure Act inherited tIRA - at my current income tax rate versus paying in a lump sum in year 10 at highest rate: was a real eye opener!

JBTX and David Jay: Many thanks and I am fully aware that there are many "Moving Parts" to my questions that make it more difficult to answer.

Q1); But you are both - agreed on the conclusion - that whether I do or do not reunite with former spouse and end up MFJ - OR - later move to a state with a lower or no state income tax: this inherited tIRA should be liquidated gradually [over each of the 10 years -as per David Jay's post] while I am in a combined federal and state bracket of: 33% rather than waiting for the expiration of the 10 years and liquidating at the likely much higher post 2026 bracket of likely: 39% [plus possible state income tax]?
Yes spreading out is best. You have too factors going on

All else equal, if tax rates were the same across all income, then deferring until the end is advantageous, as you accruing longer tax deferred. However, there is a big jump in federal rates past 24%, and rates may or may not go up as scheduled in 2026. The additional tax hit of deferring is almost certainly higher than the tax deferral benefit. If it were me I'd probably build a spreadsheet and make some assumptions and see what gives you the best results. Overall just avoiding the 32% federal rate as much as possible probably works best.
Q2) It would seem that a central tenant of Boglehead thinking is to move one' s funds from the taxable to [at least] a tax deferred space. I fully intend to continue to work with same employer the next 10 years and my employment income will not fluctuate and I am over age 50 and am able to contribute approx. $25,000 a year to retirement plan. Therefore in response to JBTX'S comment: "Rethinking this, taking money out of ira is taxable, but putting it in 457 should be tax deferral, so they should offset. As such you are deferring recognition to the future, when your tax rate will likely be lower which on the surface makes sense" and JBTX's conclusion that: "While it seems like a good idea to fund 457 with inherited IRA liquidations, I'd really advise having someone qualified to look at the totality of your situation to help with that decision."

This question - to move the funds from the inherited IRA to a tax deferred work place retirement account - is the first and most significant question that I am facing.

[I am sure that I cannot simply withdraw $25,000 a year from the tIRA and arrange for my employer's HR to withdraw this same amount from my paycheck: to achieve a tax wash.]

I assume that you are suggesting a CPA and/or Financial Planner [or some other method] to achieve this? Does any one on the forum have any suggestions as to someone or something that they might recommend [ I understand many here may be reluctant to do so ] ?
They are 2 separate transactions. First you are partially liquidating the inherited IRA. That will be a taxable event. Those funds will then be taxable, you can move them to whatever taxable or cash account you want. Second, you have your max out your 457, and your net paycheck is lower. This will give you a tax deduction. Since your lower net paycheck likely won't cover your ongoing expenses, you use some of that liquidated 457 to cover expenses.

Keep in mind you will probably be liquidating more than $25k from inherited IRA each year, assuming you spread it over 10 years. So maybe $80k comes out of inherited IRA to cash. Your 457 contributions increase $25k. You fund kids Roths. Then the balance helps with expenses or goes into a taxable investment account.

Seems like you would also want to fund a Roth IRA or backdoor Roth each year, depending on AGI. If you have access to an HSA as part of high deductible plan, consider fully funding that.
Q3) As to funding two Roth Accounts for my two adult daughters in their late 20' [over a course of many years]I would also very much to fund this from distributions from the inherited tIRA [I assume that this - as with funding my employer's 457 plan in my Q1- is whether the inherited tIRA or the taxable account is the better source of funding. If so, and it seems to me the inherited tIRA is the likely source of the funds, how much of the tIRA to tIRA to liquiduate and pay taxes each year?
You are going to be pulling more out of the inherited IRA out anyway, to spread it out, so may as well use some of that to fund kids Roths.
As to JBTX' s comment: "you may want to evaluate whether you want money to pass to daughters as is or in trust. In trust provides greater protections, but also has higher trust tax rates. It really depends on their level of financial literacy and stability, as well as their marital stability.- funding kids Roth IRA is a good idea. "

Fortunately, my two daughters financial and emotional literacy and stability is fine and I would therefore much prefer funding two Roths for them rather than using a trust with its associated - very high - trust rates of taxation. But: I would also strongly suggest to my daughters that they later use a pre-nuptial agreement when/if they ever think of marriage limiting assets available in event of divorce to those "earned by own efforts... during the marriage" [or similar or even more comprehensive language].
Yeah that's a judgment call. I tend to agree with you given your situation. However my kids, one disabled, one spendthrift, will absolutely have trusts. If for some reason you did decide to go trust, it may make sense to do Roth conversions after retirement, because Roths will avoid the higher trust tax rate.
Q4) As to my question as to the legacy wealth management firm currently managing my assets with the .85% AUM and possible conversion to Vanguard PAS. Thank you for the suggestion that if we slightly round up the value the inherited IRA to 1M and the taxable account to 1m: that PAS would represent a savings for .55% a year on each of these two accounts. I saw the link below referred to as useful to calculating the cost of wealth management AUMS versus indexing and DYI:

https://www.begintoinvest.com/expense-ratio-calculator/

-Are there other links [or other resources] that might be helpful in making similar comparisons?

Q5) AS to moving into apartment jointly owned by ex-spouse in March 2022 when my current high cost rental lease expires - OR -if this does not work out [for any reason] then purchasing an apartment of my own for $100,000 in lower COLA - it does seem to accord with all that I have read on this forum as I would seek to invest in tax advantaged accounts [or otherwise] any savings. The extra commutation time would be on a train and would not be burdensome. Any comments on this by anyone on forum on this course of actionare welcome

Any further thoughts on any parts of the above are most appreciate. *My deepest thanks to any who have responded*

Thank you!
I am not sure what further tax advantaged opportunities you will have. You will be maxing the 457. If you can do a Roth or a backdoor you should do that anyway each year. Your agi is probably too high for a Roth, after the 457 distribution, but it could be close. That could be a consideration for how much 457 to liquidate. Otherwise you should be able to do a backdoor Roth, if you don't have any other traditional IRAS (excluding inherited iras). If you have access to HSA as part of high deductible medical benefits plan, definitely max that out. You should be doing all of those every year ASAP to the extent you have access to them.
MarginalUtility
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by MarginalUtility »

The OP might want to consider consulting a tax professional before deciding whether to move from NY to a nominally lower-tax jurisdiction at age 71, particularly if the OP withdraws all or most of his inherited IRA by that age. New York does not tax Social Security retirement income. And New York almost certainly will not tax the OP's New York civil service pension.
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Kenkat »

Q2) It would seem that a central tenant of Boglehead thinking is to move one' s funds from the taxable to [at least] a tax deferred space.
I would say the central tenet is to take advantage of tax advantaged space before you utilize taxable. But that’s more effective when you are younger than when you are closer to pulling that money back out.

I would probably take the tIRA money out in 10 equal installments starting this year. Fund your 457 to offset some of the tax liability. The taxable account received a stepped up basis on your mother’s passing and so that is money you can access tax free (largely, depending on future gains).

When your pension and social security kick in at age 70, you are going to have a lot of money coming in so it just seems beneficial to have the tIRA mostly emptied by then if possible. You will have to start pulling money back out of the 457 at age 72 I believe under current law but there are worse things than paying taxes on all this money! :wink:

Regardless of how much or how little planning you’ve done around retirement, you are in really good shape I think.
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Katietsu »

As a state employee, do you have access to both a 457b and a 401k? I think NY has both. If so, you could effectively move $52,000 a year from the inherited IRA to a retirement account of your own. You could get another $7000 into an IRA. Do that for 10 years and a sizable amount of the money currently in the inherited IRA will end up in your own retirement accounts.

I would suggest that your next move should be either:
1) Find an hourly planner. Preferably one familiar with your pension system.

2) Proceed yourself for now. But do it one small step at a time. Step 1 is to find out if you can contribute $26,000 to the 457b and $26,000 to the 401k. Find out what you need to do to get started. You will want as much of your remaining pay in 2021 as allowed to go into one or both of these plans. The longer you wait the less you might be able to contribute for 2021. You will withdraw from the inherited IRA to pay your rent and buy your food.

There is nothing inherently wrong with TIAA or Voya. I am not sure why you think your options are “unfortunate”. If you want investment advice, I would start a new thread that includes NY State Employee 457 in the title. I believe there are several forum members that participate in your system.
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Alan S. »

Could you please clarify whether you were a named beneficiary on the TIRA directly, or if her estate was the beneficiary and you acquired the inherited IRA by the executor assigning the IRA out of the estate to the estate beneficiaries.

If the latter, the 10 year rule does not apply. Your distribution period would be the remaining LE of your mother based on the age at her birthday in 2020. Would also need to know that age.
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Matt212
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Matt212 »

[All else equal, if tax rates were the same across all income, then deferring until the end is advantageous, as you accruing longer tax deferred. However, there is a big jump in federal rates past 24%, and rates may or may not go up as scheduled in 2026. The additional tax hit of deferring is almost certainly higher than the tax deferral benefit. If it were me I'd probably build a spreadsheet and make some assumptions and see what gives you the best results. Overall just avoiding the 32% federal rate as much as possible probably works best.]

JBTX: Many, many thanks: this answers the first question. I will then proceed - to try to figure out [either with software or with a CPA or financial adviser] how to best pay spread my payment of the taxes on the post-secure Act inherited tIRA - over the ten year period. I must thank you and the now several other forum members who suggested this tax strategy; for some very illuminating advice. I had a cognitive block of just watching the tIRA grow without taxes the first year - but ignoring just how much being in the super bracket would cost- when the tax bill came due in the highest bracket

[They are 2 separate transactions. First you are partially liquidating the inherited IRA. That will be a taxable event. Those funds will then be taxable, you can move them to whatever taxable or cash account you want. Second, you have your max out your 457, and your net paycheck is lower. This will give you a tax deduction. Since your lower net paycheck likely won't cover your ongoing expenses, you use some of that liquidated 457 to cover expenses.

Keep in mind you will probably be liquidating more than $25k from inherited IRA each year, assuming you spread it over 10 years. So maybe $80k comes out of inherited IRA to cash. Your 457 contributions increase $25k. You fund kids Roths. Then the balance helps with expenses or goes into a taxable investment account.

Seems like you would also want to fund a Roth IRA or backdoor Roth each year, depending on AGI. If you have access to an HSA as part of high deductible plan, consider fully funding that.]

JBTX: If I take a distribution of $80,000 I will then have to start both maximizing my contibution to the 457 and start a back door Roth. Two years ago I had opened a Roth under current income of $75,000 and I am single so I will exceed the limits for a Roth. I do not have any other IRAs. I do not have access to an HSA: although I will double check this with my employer.

[Yeah that's a judgment call. I tend to agree with you given your situation . However my kids, one disabled, one spendthrift, will absolutely have trusts. If for some reason you did decide to go trust, it may make sense to do Roth conversions after retirement, because Roths will avoid the higher trust tax rate.]

JBTX: I will - also - use the tIRA's distributions to fund the two Roths for my two adult daughters as this will maximize the use of the tax sheltered space and they are responsible. Anything beyond that will have to go to taxable

However: one of my two sisters who inherited the same amount as I did: has exactly your situation of two kids: one disabled and one spendthrift and wants to set up trusts [of which I will be one trustee]. I would be interested on her behalf to know how to fund a trust [in any manner] by doing " Roth conversions after retirement, because Roths will avoid the higher trust tax rate" ?
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Matt212
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Matt212 »

MarginalUtility wrote: Fri Sep 03, 2021 4:59 pm The OP might want to consider consulting a tax professional before deciding whether to move from NY to a nominally lower-tax jurisdiction at age 71, particularly if the OP withdraws all or most of his inherited IRA by that age. New York does not tax Social Security retirement income. And New York almost certainly will not tax the OP's New York civil service pension.
Marginal Utility: You make a very good point. New York State does not tax social security income and it does not tax New York State Employee Retirement Income. If I keep my Taxable Account in large cap shares [that generate few dividends] and tax free munis this would make New York State much more attractive for retirement. I would have to see how it treats the income of my former spouse if we remarry who has been in TIAA for 30 years. Thank you!
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Matt212
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Matt212 »

[I would suggest that your next move should be either:
1) Find an hourly planner. Preferably one familiar with your pension system.

2) Proceed yourself for now. But do it one small step at a time. Step 1 is to find out if you can contribute $26,000 to the 457b and $26,000 to the 401k. Find out what you need to do to get started. You will want as much of your remaining pay in 2021 as allowed to go into one or both of these plans. The longer you wait the less you might be able to contribute for 2021. You will withdraw from the inherited IRA to pay your rent and buy your food.

There is nothing inherently wrong with TIAA or Voya. I am not sure why you think your options are “unfortunate”. If you want investment advice, I would start a new thread that includes NY State Employee 457 in the title. I believe there are several forum members that participate in your system]

Katiesue: I very much regret that I do - not - have access to both a 457b and a 401k. I have not ever read or heard of the availability of any other retirement plan than a 457b at my employer. But I will double check that with my employer.

1) I would like to hire an hourly fee based financial planner. If any one has a recommendation to share, I will consider that?

2 I also completely agree with you that the time to do something is now as it is late in the year: and I want to start to contribute for 2021

3) I will also take your advice and start a new thread [and further research] New York State Employee Retirement system 457.

Note: My concern was that both the TIAA and Voya plans [who as providers are well known and reputable] offered by my library inside my own retirement plan - are annuities - and I have read elsewhere in these forums that annuities inside a retirement plan are not optimal. But I very much want to find out what my options are and get started with the best of whatever is available: this month!

K Thank you for these suggestions - acting on them - is now up to me!
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Matt212 »

Alan S. wrote: Fri Sep 03, 2021 6:21 pm Could you please clarify whether you were a named beneficiary on the TIRA directly, or if her estate was the beneficiary and you acquired the inherited IRA by the executor assigning the IRA out of the estate to the estate beneficiaries.

If the latter, the 10 year rule does not apply. Your distribution period would be the remaining LE of your mother based on the age at her birthday in 2020. Would also need to know that age.
Alan: I was a named beneficiary on my mother's tIRA 'FBO [my full name]". I did not inherit it through the Estate and I do not qualify for any of the narrow exceptions to the 10 years rule under the Secure Act.
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22twain
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by 22twain »

Matt212 wrote: Fri Sep 03, 2021 11:40 pm Note: My concern was that both the TIAA and Voya plans [who as providers are well known and reputable] offered by my library inside my own retirement plan - are annuities - and I have read elsewhere in these forums that annuities inside a retirement plan are not optimal.
I know nothing about Voya's retirement-plan annuities. I can speak to TIAA because my wife and I have been in TIAA 403(b) plans for many years (now retired). Their retirement annuity accounts are very different from the various flavors of complicated annuities peddled by typical insurance salespeople. During accumulation, they behave similarly to ordinary mutual funds. The biggest practical difference is that they do not pass along the dividends of the underlying stocks and bonds to you separately, but instead re-invest them inside the account and increase the account's price per "share" (TIAA calls them "units"). When you retire, you can take distributions (including RMDs when the time comes) similarly as with other tax-deferred accounts (IRAs etc.); you can also annuitize part or all of the accumulation to provide a lifetime income stream.

The one TIAA offering that you need to take special care with is the TIAA Traditional account, a sort of stable-value fund with a guaranteed minimum interest rate. Certain "flavors" of it have restrictions on withdrawals.
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Sandi_k »

I think you are making this more complicated than it needs to be. There are things you can do right now:

1) Calculate how to max out your 457(b) between now and the end of the year. Sign up and make it happen, now.

2) Take out 1/10th of the inherited IRA now, and stash it in the taxable brokerage account.

3) Find an hourly advisor. I would be excited to use someone like Rick Ferri (from this forum, and well known in the Boglehead and FP community).

https://rickferri.com/

4) Set up gifting of $15k per year to your kids, which they can use to max out Roth accounts.

5) Set up your own trust, so that your estate is in good shape for you kids, and they are protected. Will, trust, Power of Attorney, Advanced Medical Directives.

6) Find a CPA for your team.

Conversations with the CPA, financial planner and the trust attorney will lead to next steps.
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Matt212
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Matt212 »

22 Twain: Can you provide some links or books [or other sources] that provide sources as to contributing - and especially withdrawing funds in retirement from TIAA - as they are as it is a likely candidate for my 457b -but also as- my former spouse [and closest friend] is a long time participant and has 32 years and 1M in assets with TIAA and is the same age as me: 61?
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Matt212 »

Sandi:

1) and 2) I will sign up for the 457b and take 1/10 of the inherited account: now

3) Rick Ferri is "not taking new clients until 2022" and recommends another planner he this year started referring new clients to: Jon Luskin in Ca. I will contact Jon Luskin

Q: I would appreciate recommendations from Forum Members of any other financial planners that may be recommended consistent with Bogglehead principles?

4) Gifts of up to 15k per year per child: will be done

5) I do have a new and complete Will, trust for my two adult daughters if I die before they turn age 35, POA and Medical Directive: as of a few months ago

6) Q: I do - not - have a good CPA as up until this time I did not need one - but per your recommendation to obtain one and as both the numbers and the issues are changing drastically this year after windfall - I would appreciate any recommendations by forum members for a good CPA [in any state] that might be helpful?

Thank you - and I will action this!
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by WoodSpinner »

Matt212 wrote: Sat Sep 04, 2021 4:01 pm Sandi:



Q: I would appreciate recommendations from Forum Members of any other financial planners that may be recommended consistent with Bogglehead principles?
Check your PM for a recommendation. Might not even need a CPA…

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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Sandi_k »

Excellent! Getting started is important, and it's very easy to just research stuff to death. ;)

You're going to be more than fine!
Matt212 wrote: Sat Sep 04, 2021 4:01 pm Sandi:

1) and 2) I will sign up for the 457b and take 1/10 of the inherited account: now

3) Rick Ferri is "not taking new clients until 2022" and recommends another planner he this year started referring new clients to: Jon Luskin in Ca. I will contact Jon Luskin

Q: I would appreciate recommendations from Forum Members of any other financial planners that may be recommended consistent with Bogglehead principles?

4) Gifts of up to 15k per year per child: will be done

5) I do have a new and complete Will, trust for my two adult daughters if I die before they turn age 35, POA and Medical Directive: as of a few months ago

6) Q: I do - not - have a good CPA as up until this time I did not need one - but per your recommendation to obtain one and as both the numbers and the issues are changing drastically this year after windfall - I would appreciate any recommendations by forum members for a good CPA [in any state] that might be helpful?

Thank you - and I will action this!
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by 22twain »

Matt212 wrote: Sat Sep 04, 2021 2:16 pm 22 Twain: Can you provide some links or books [or other sources] that provide sources as to contributing - and especially withdrawing funds in retirement from TIAA
Your investment options depend on the plan that your employer has negotiated with TIAA. My wife and I taught at a small private college that has a rather bare-bones plan by today's standards. When we started out (she in the late 1970s, I in the mid 1980s), we had had exactly two investment options: the "bond-like" TIAA Traditional account with a guaranteed 3% minimum interest rate (the actual rate was much higher when we started), and the CREF Stock account which is about 70% domestic and 30% international, and has been mostly index-based in recent decades at least. Around 1990 our plan added some more "fine-grained" CREF accounts to satisfy people who want to "slice and dice." Larger institutions tend to have more options in their TIAA plans. Some even have Vanguard institutional mutual funds IIRC.

(We've stuck with TIAA Traditional and CREF Stock all along, and still use only those two today.)

So your first stop should be your employer's HR department, to get all the documentation they have on your TIAA options. Then you can start searching for information about those options.

Pay special attention to your options for the TIAA Traditional annuity account, because there are different "flavors" with different characteristics. Find out which flavor(s) you have available. The ones that I remember reading about are:

Retirement Annuity (RA)
Group Retirement Annuity (GRA)
Supplemental Retirement Annuity (SRA)
Group Supplemental Retirement Annuity (GSRA)
Retirement Choice (RC)
Retirement Choice Plus (RCP)

For the flavors that you have available, find out the guaranteed minimum interest rate. The interest rate for current contributions is now probably at the minimum for all flavors, but you might check into that, too. Also find out the restrictions on withdrawals. If you Google around for things like "TIAA Traditional withdrawal restrictions" you'll probably turn up a whole mess of stuff for the different flavors, but you first need to know what flavors are relevant to you.

The CREF annuity accounts (CREF Stock and later arrivals) are pretty straightforward as far as withdrawals are concerned, as far as I know.

Then there's the TIAA Real Estate account (TREA), which I think we have available, but have never bothered with, mainly out of ignorance and/or laziness. Some people are big fans of it, however.
Meet my pet, Peeve, who loves to convert non-acronyms into acronyms: FED, ROTH, CASH, IVY, ...
TigerJulie
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by TigerJulie »

Check to see if your Social Security benefits will be reduced because you receive a state pension. If you don't pay into Social Security on the job from which you will receive the pension, look at the Windfall Elimination Provision.
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celia
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by celia »

Matt, Sorry I’m late to this thread, but just found it from a link in another thread of yours. This thread certainly fills in your background information better.
Matt212 wrote: Thu Sep 02, 2021 12:01 pm My first question is that if my mother died in June 2020 and had not taken a distribution from the IRA and no other distribution was taken from the IRA in 2020 pursuant to CARES Act: how many years are left to distribute the inherited tIRA and what is the final year: 2031?
Since your mother died in 2020, you have until the end of 2030 to empty out the Inherited IRA you received from her. (In 2020, RMDs were not required to be withdrawn because of the pandemic and economic uncertainty for so many.)
I also have a very modest personal Vanguard Roth of approximately $15,000 [opened 2020] that I will make the maximum contribution to until retirement 2031 in an Vanguard VASGX 80/20 fund.
For Roth contribution purposes, MAGI can be defined as your household's adjusted gross income with tax-exempt interest and certain deductions added back in. Your MAGI will include the IRA withdrawal you take each year.
If you are Single and your MAGI is under $125,000 this year, you can contribute the max to a Roth IRA. Between $125,000 and $140,000, you can contribute a lesser amount. And if your MAGI is over $140,000, you can’t contribute to a Roth directly at all.
If you file as MFJ and your MAGI is under $198,000 this year, you both can contribute the max to a Roth IRA. Between $198,000 and $208,000, you can contribute a lesser amount. And if your MAGI is over $208,000, neither of you can contribute to a Roth directly.

Did you notice I used the word “directly” above? Have no fear! If your MAGI is too high, you can still contribute indirectly by using a method known informally as the Backdoor Roth. To make the best use of this, it is best if you have no other traditional IRAs with money in them, excluding Inherited IRAs, else you will be subject to the pro rata rule.
My own personal financial situation: I very much regret that I am possibly the oldest person to ever become interested my own retirement ...
You are by no way the only person who didn’t starting thinking about retirement until so late. We have threads currently active that talk about parents who didn’t plan for retirement at all. For example:
viewtopic.php?f=2&t=358570&newpost=6238 ... ead#unread
viewtopic.php?p=6235146#p6235146
Q1): I very much regret that I have never contributed to my employer's two offered 457 plans at all. Note: unfortunately, these are tax defered annuities offered either from the TIAA and Voya family of funds. These are available - but - it would not be possible for me to invest in them in a meaningful way in the next 10 years: without using the funds from one or the other of the two inherited accounts above: and I am willing to do this if a good idea. I would appreciate any advise on how to fund this from tIRA or from taxable account . Again: I would like to leave as much of the tIRA [after conversion to taxable] and the taxable accounts as an inheritance to my adult daughters?
In another thread, you say you are thinking of contributing to a 403b. Do you have access to both types of accounts? That would be a better option for you. The 457 and 403b are both tax-deferred accounts, with not much difference between them except that the employer chose companies that offer annuities for the 457.
Matt212 wrote: Fri Sep 03, 2021 3:20 pm Q2) It would seem that a central tenant of Boglehead thinking is to move one' s funds from the taxable to [at least] a tax deferred space.... Therefore in response to JBTX'S comment: "Rethinking this, taking money out of ira is taxable, but putting it in 457 should be tax deferral, so they should offset. As such you are deferring recognition to the future, when your tax rate will likely be lower which on the surface makes sense"...
No, that’s not a central part of Boglehead thinking. It’s just that many of us use tax-deferred accounts during our working years and want to pay taxes on some of our income later, when (if) we are in lower tax brackets later on. During our early retirement years, many of us also convert money in tax-deferred accounts to Roth or contribute directly to Roths.

In case you don’t have a clear distinction between tax-deferred plans (401K, 457, 403b) and Roths, the tax-deferred contributions are not taxed in the year the contributions are made. This is why they can lower your income in the year the money is contributed. But later on, both the contributions and growth are taxed on every dollar withdraw. Required Minimum Distributions (RMDs) are required starting at age 72, but you can always withdraw without penalty any time after age 59.5 or convert them to Roth.

Roth 401K and IRAs, on the other hand, have their contributions taxed when the money goes in. Later, when you withdraw the contributions and the growth, the distributions are tax-free, as long as you are over 59.5 and the Roth IRA has been open 5 years. On Bogleheads, there are often on-going conversations on which should be used and when. The basic rule of thumb is to pay the taxes when your tax rate is lower. But the big unknown is what tax brackets you will be in later on compared to the current time.
[I am sure that I cannot simply withdraw $25,000 a year from the tIRA and arrange for my employer's HR to withdraw this same amount from my paycheck: to achieve a tax wash.]
Contributions to employers’ plans are required to be made from your paycheck. I don’t know if you still have enough time left this year to still earn $25,000, but you could still contribute as much as you can and probably need to take $85K out of the Inherited IRA anyway.
As to JBTX' s comment: "you may want to evaluate whether you want money to pass to daughters as is or in trust. In trust provides greater protections, but also has higher trust tax rates.
It depends on what kind of trust you have. If you have a living trust (which is revocable), you are taxed the same as if you didn’t have a trust. After you die, the trust becomes irrevocable, then the higher taxes apply. But at that time, you likely have something else happen to benefit your daughters. You will want to learn about living trusts soon. Start by searching the forum for “living trust” or similar.
Q4) As to my question as to the legacy wealth management firm currently managing my assets with the .85% AUM and possible conversion to Vanguard PAS. Thank you for the suggestion that if we slightly round up the value the inherited IRA to 1M and the taxable account to 1m: that PAS would represent a savings for .55% a year on each of these two accounts.
Here’s another way to think about the AUM fees, that occurred to me recently. AUM of 0.85% on a million dollars mean you are giving the custodian/advisor $8,500 a year. You could use that money to pay taxes instead. That would cover taxes on $56,000 of long term capital gains at a 15% rate in taxable if your other Taxible Income (without the LTCG) was between $40K to $445K (Single) or between $80K and $501K (MFJ)! That’s a lot of profit you would already have covered by paying taxes instead of AUM.

It looks like your regular income is already taxed near the top of the 22% tax bracket. Saving $8,500 in AUM in a $1M IRA would mean you could pay taxes on $34K of IRA withdrawal (if Single).

State taxes were not considered in either calculation. I was just showing you a mental shift of how to think about the $8,500 in AUM fees you pay each year.
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Matt212
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Re: 2M Windfall: Post Secure Act tIRA and Taxable account and Need Retirement/Tax Advice

Post by Matt212 »

Celia: Thank you for once again providing clarity on so many matters!

1) I am glad to know that if my mother passed away in June 2020 that the entire inherited tIRA of $850,000 must under the Secure Act be emptied out by December 31, 2030.

I knew that the Secure Act provides a 10 year limit on withdrawals from the tIRA. And that the Cares Act suspended the need to take withdrawals from all IRA's in 2020. I* needed clarification the date by which all funds must be withdrawn from my post Secure Act tIRA was December 31, 2020. Thank you for providing this.*

2) From the earlier posts in this thread: I will now be withdrawing from the 850K inherited tIRA over 10 years as it results in a lower overall tax bite than one large withdrawal in year 10.

3) I will - try to reduce the taxes from taking approximately 85K starting this year [2021] -an each of the remainder of the 10 years - by contributing 26K a year to my employer's 403B plan. I have confirmed that there is only one employer provided plan available to me: the 403 B and that I misspoke when I earlier in this thread referred to this plan as a "457 Plan." I thoroughly understand the difference between the tax deferred 403B plan and a Roth IRA. I will also continue to contribute $7,000 a year to my personal Roth IRA- [likely now as a "back door" Roth due to the increase in my MAGI/ income.] I am fairly sure that my non profit employer does not offer any Mega Roth options but I will ask to see the Plan documents and confirm this. Likewise there is no workplace high deductible insurance plan

4) Importantly - the only other way that I have been able to identity - to participate in tax advantaged plans from the required Post Secure Act 85K a year distributions - would be to start to fund two 529 plans in the names of my two adult daughters in their late 20s. The goal of these two 529 plans will be to *initially* name these for my adult daughters: but later change the beneficiaries to any grandchildren that are born. Any comments on this course of action or any alternative means to reduce taxes on the $85k tIRA distribution are welcome?



5) I will find out more about Living Trusts as I am not sure how they might assist one in my situation: Inherited tIRA of $850,00 [that must be converted at approximately $85,000 a year into taxable income] and also an inherited taxable account of 1M and on my annual salary income of $75,000 a year

6)A) Celia's point about the sharp reduction of the .85% AUM fee that is assessed by the legacy advisor on the 1M Taxable Account [and the .85% AUM is also charged on the $850,000 tIRA] as generating a savings that would enable me to cover a good bit the approximately 85K in annual tIRA withdrawals each year is an excellent one.

B) The savings of from the great reduction in AUM fees could - also - be applied to the separate 15% Federal capital gains [plus New York State income taxes due on Capital Gains] on the $200,000 gain since the date of my mother's death on the sale of the 30 S&P 500 shares in the 1M Taxable Account. As Celia notes this AUM savings could also: "cover taxes on $56,000 of long term capital gains at [my] 15% rate in taxable"

C) However, as to the potential $200,000 gain in the 1M Taxable account, I assume that - despite my own desire to [very quickly] construct a 3 fund portfolio -that it is best - to wait for a downturn in the Market and Tax Loss Harvest the individual shares? Am I correct in my working assumption that about $30,000 in federal Capital Gains taxes are due on the $200,000 plus the applicable New York State and NYC taxes on the $85 annual inherited tIRA distribution and my $75,000 annual salary are the total Capital Gains taxes due that I am looking at?

Footnote: Related to this is has also been pointed out to me that I could [at least delay taxes] by also selling some portion [possibly half] the shares in Taxable Account that are those subject to the $200,000 Capital Gains in the 1M Taxable Account before the end of 2021 - and then more share in early 2022 - to half any capital gains due on the sale of the shares in the Taxable Account in any one year.

Celia and all othes: Many thanks - and any and all comments - are welcome.
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