End of tax year financial decisions -- not spending "enough" in retirement?

[Jingthing]

OK I do have a specific issue but this can be more general if people are interested.

Many members here are in retirement and have "nest eggs" that ideally should be spent to a reasonable degree  unless their focus is purely on leaving a legacy.

Well as a U.S. national I have a end of tax year issue. 
I am heavily invested in stocks in my retirement account but I don't really need to spend even one dime from it any time soon. 

Why? 

I had a lot of big spending plans before the pandemic but now it's almost hard to spend much money.

Typical financial advice is to withdraw 3 to 4 percent of your nest egg once you're in that phase of your life. 

Often there is advice to cut that down during down markets.

But rarely is there advice about what to do if you don't need any of it.

So the market is really up now and if I defer a larger withdrawal to a later year there would be a taxation hit.

So I'm considering doing the standard 3 to 4 percent withdrawal and just bank the money for future larger expenses.

But the bigger issue here is a problem that isn't talked about much. Not spending enough money. 

[Airalee]

Sometimes, doing nothing is ok too.

[gamb00ler]

I'm not sure I understand the exact nature of your problem.  I'll just give some general tax planning suggestions.

 

I believe that US tax rates will be going up.  Biden has stated that most of that will fall upon those with high income.  But of course the degree of tax increase is heavily dependent on which party has the senate majority after the Georgia senate runoffs in January.  If I'm correct then it may prove beneficial to increase the withdrawals from pre-tax accounts for 2020 so that you take advantage of the currently low tax rates.

 

If you've already collected the $1200 fully refundable 2020 tax credit that was included in the CARES stimulus package I believe that they won't ask for it back even if you subsequently have high income for 2020 that would have disqualified you.

 

The free Excel spreadsheet ( https://sites.google.com/view/incometaxspreadsheet/home ) is very easy to use.  By putting in the amounts for the types of income which you cannot change (interest, dividends, W-2's, 1099's, etc) and then varying your 1099-R income you can immediately see how each change affects federal income tax.  You can choose the EXACT 1099-R amount that will maximize your income and still keep you in the tax bracket of your choosing.  The spreadsheet makes calculation of your marginal tax rate simple.

 

FYI, 2020 tax brackets are 10% up to $9,875, 12% up to $40,125, 22% up to $85,525 based upon Taxable Income.

 

Happy Tax Planning!

 

P.S.  Start a little earlier next year.

[Jingthing]

Talking about a classic IRA. Withdrawals are taxed as income.

[ChouDoufu]

1 minute ago, Jingthing said:

Talking about a classic IRA. Withdrawals are taxed as income.

 

can you convert a portion of that to a roth ira?

[gamb00ler]

1 minute ago, Jingthing said:

Talking about a classic IRA. Withdrawals are taxed as income.

Right... you will get a 1099-R for your withdrawal amount(s)

[gamb00ler]

1 minute ago, ChouDoufu said:

 

can you convert a portion of that to a roth ira?

Certainly that can be done.  However make sure you understand all the consequences especially the 5-year rule regarding Roth conversions.

[Jingthing]

2 minutes ago, ChouDoufu said:

 

can you convert a portion of that to a roth ira?

Not on my agenda at this point. 

[ChouDoufu]

1 minute ago, gamb00ler said:

Certainly that can be done.  However make sure you understand all the consequences especially the 5-year rule regarding Roth conversions.

 

sure, but if you have both a roth and a reg'lar ira, you should have more options with your future planning.

[gamb00ler]

1 minute ago, ChouDoufu said:

 

sure, but if you have both a roth and a reg'lar ira, you should have more options with your future planning.

Certainly once the Roth has aged 5 years you have greater flexibility.

[timendres]

Assuming some of your IRA is invested in the stock market, I would argue that, with the markets where they are at the moment, there is the potential for a sizable correction in 2021. So, I would be inclined to sell some stock at this moment in time, and park it in gold, or another hard asset, given the current fiscal policies. Of course, this needs to be considered with regards to the tax bite you will take.

[kokesaat]

From lessons learned:  Two years ago I rescrambled my Vanguard account where I sold a number of mutual funds and invested in others.  Big mistake!  I'm a US vet, so I pay into medicare part B to be eligible for Tricare for Life (that gives me medical coverage while overseas, among other things).  First problem was the substantial tax penalty incurred by selling any of my funds, which I had for years.  Second bonus problem, the rise in my 'annual income' for that tax year meant I paid about $300 more per month for my medicare part B.  Fortunately, that year is now over and in January, my medicare part B payment goes back to about $150 per month.

On the positive side, I expected to begin making annual required withdrawals from my IRA account this year......age 70......but the government now says the mandatory withdrawals don't begin until age 72.

As for any market corrections, I've been through multiple corrections over the years, but always follow Peter Lynch's advice......keep your seatbelt fastened and ride out the corrections.  His advice has served me well over the many decades.

If you find yourself in the enviable position of not needing your retirement savings (IRA), it might be time to consider the MacKenzie Scott option.  There are oodles of needy people/organizations out there.....and in Thailand, $1000 donation goes much much further than the same in the US.  You could consider setting up a scholarship program for deserving students at a local school, as one example.

Good luck with your future.

[bendejo]

My numbers aren't very big.  I have an IRA account that allows me to trade stocks.  Considering my SS income and a few other accounts that produce interest (in unimpressive amounts), I figured that I can withdraw roughly $12k per year without having to pay any tax.  This I put into some sort of savings/mm account.  With interest rates as low are they are (less than 1%) I'm not concerned about the tax liability on them.

I suggest you do what I did: have a look at your last return and play with the figures to see what you can move out of your IRA(s) and still come up with a total tax of $0.

 

Since 2008 I am wary of where to move it to, seeing how so many well-established, well-respected institutions suddenly turned to dust.

 

 

[Jingthing]

30 minutes ago, bendejo said:

My numbers aren't very big.  I have an IRA account that allows me to trade stocks.  Considering my SS income and a few other accounts that produce interest (in unimpressive amounts), I figured that I can withdraw roughly $12k per year without having to pay any tax.  This I put into some sort of savings/mm account.  With interest rates as low are they are (less than 1%) I'm not concerned about the tax liability on them.

I suggest you do what I did: have a look at your last return and play with the figures to see what you can move out of your IRA(s) and still come up with a total tax of $0.

 

Since 2008 I am wary of where to move it to, seeing how so many well-established, well-respected institutions suddenly turned to dust.

 

 

I'm in small potatoes territory as well. As I own my home in Thailand and with the new normal of the Corona era, my expenses are even lower than usual.

 

I have a similar tax situation as well and your advice is relevant to me.

 

A superficial reading of what I've posted here could easily give the impression that I'm rolling in dough. Sadly I'm not. 

 

But on the other hand,  I'm starting to think it's crazy to spend so little which probably developed as a habit because I retired very early and realized that was my only hope of making it long term. 

 

For example, wine.

I used to love wine but because it's such a total rip off in Thailand, I cut it off almost entirely. This is more on point to the secondary topic here which is my impression that many people just sit on their nest eggs and don't shift into a higher spending phase of their life. (You can't take it with you.) Because naturally the most important financial thing for an older person is never running out of money, but that fear can lead to irrational self deprivation. 

 

 

[Jingthing]

2 hours ago, kokesaat said:

From lessons learned:  Two years ago I rescrambled my Vanguard account where I sold a number of mutual funds and invested in others.  Big mistake!  I'm a US vet, so I pay into medicare part B to be eligible for Tricare for Life (that gives me medical coverage while overseas, among other things).  First problem was the substantial tax penalty incurred by selling any of my funds, which I had for years.  Second bonus problem, the rise in my 'annual income' for that tax year meant I paid about $300 more per month for my medicare part B.  Fortunately, that year is now over and in January, my medicare part B payment goes back to about $150 per month.

On the positive side, I expected to begin making annual required withdrawals from my IRA account this year......age 70......but the government now says the mandatory withdrawals don't begin until age 72.

As for any market corrections, I've been through multiple corrections over the years, but always follow Peter Lynch's advice......keep your seatbelt fastened and ride out the corrections.  His advice has served me well over the many decades.

If you find yourself in the enviable position of not needing your retirement savings (IRA), it might be time to consider the MacKenzie Scott option.  There are oodles of needy people/organizations out there.....and in Thailand, $1000 donation goes much much further than the same in the US.  You could consider setting up a scholarship program for deserving students at a local school, as one example.

Good luck with your future.

Thanks for that very interesting post.

However I'm quite confused by your description of your Vanguard account creating tax and higher income problems for you.

Was it an IRA? If it was a traditional IRA, how could there be a tax implication unless you actually withdrew the money out of the IRA account entirely?

 

How Are You Taxed After Selling a Mutual Fund in an IRA? (investopedia.com)

[kokesaat]

18 minutes ago, Jingthing said:

Thanks for that very interesting post.

However I'm quite confused by your description of your Vanguard account creating tax and higher income problems for you.

Was it an IRA? If it was a traditional IRA, how could there be a tax implication unless you actually withdrew the money out of the IRA account entirely?

 

How Are You Taxed After Selling a Mutual Fund in an IRA? (investopedia.com)

I had a Schwab account in addition to my Vanguard account.  I was trying to streamline the number of accounts I had (Thai banks included), and as a result, I off-loaded my Schwab into new funds in Vanguard.  That was my mistake.  The double wammy came when I realized my medicare part B bracket was much higher (for one year).  I chalk it up to lessons learned in life.

You're right about the concerns of saving when you're young, then saving for retirement, then finding that as you grow older, you have your house, your vehicle, your furnishings and need less but have more money than you did when you needed those things.  I think living in Thailand offers another benefit as well.....whether it's keeping up with the Jones or remodeling a perfectly functional kitchen just because it's out of date.  We have a nice but not fancy house in a small village outside of Udon.  We could easily spend a million baht changing out the 24year old tile flooring or putting in a more western kitchen, but we don't because what have still suits us fine, it's not dumpy, and we'd prefer not to go through the hassles of major interior work in our older years.  I liken it to the idea behind 'sufficiency economy' here in Thailand, or 'Mother Earth News' which I subscribed to in my much younger years.  It just seems so much easier to hang your clothes out to dry in Thailand.....like most everyone else.......rather than the fear of upsetting a neighbor as you would probably do in most residential areas in the US.

Now in our older years, we take pleasure in going to a good restaurant on occasion, not having to think twice about buying something we want, or helping pay for the education of the child of a hard-working deserving Thai friend.  There's a sweet spot somewhere between saving and finally realizing you've saved enough to ensure your remaining years are covered.

[Sterling]

I didnt see anyone mention IRA Required Minimum Distributions (RMDs).

You are required to take an RMD from an IRA but once you take it out, you can put that money in a savings or brokerage account instead of spending it.

 

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

https://www.fool.com/retirement/plans/ira/required-minimum-distributions/

https://www.schwab.com/ira/understand-iras/withdrawals/required-minimum-distributions

[khunjeff]

19 hours ago, Jingthing said:

But rarely is there advice about what to do if you don't need any of it.

So the market is really up now and if I defer a larger withdrawal to a later year there would be a taxation hit.

So I'm considering doing the standard 3 to 4 percent withdrawal and just bank the money for future larger expenses.

But the bigger issue here is a problem that isn't talked about much. Not spending enough money. 

 

Actually, if you look around in articles and literature related to retirement, this subject does come up fairly regularly - though of course not nearly as often as "running out of money", since "not spending enough" is a much less common problem.

 

There are two issues, usually related: 1) you became accustomed to saving, and can't get out of the habit and switch over to spending mode (or you're just naturally thrifty by temperament); and 2) you're ok with spending, but just can't find anything you want to spend on (especially with Covid, where using money to travel is mostly off the table) - or maybe you've just become a sedentary homebody as you aged.

 

In terms of (1), just try to regularly remind yourself that you have plenty of money to do what you want, and that you're not in danger of going broke. You enjoy wine, but it's a rip-off here? Buy it anyway, you earned it - and these years are what you were saving for all that time. I feel as you do, so I just look for wine that's on sale or remainder or whatever, and try to ignore the fact that even the sale price is double what the wine should cost. I end up drinking wine that isn't as good as what I might drink elsewhere, and at higher prices, but I can afford it, so why deny myself completely?

 

For (2), ask yourself whether there really are things to buy that would make you happy, but that you're not even considering because you're so used to rejecting expenditures. More or more lavish meals out? Nicer hotels when you travel? Business class tickets? If there aren't, don't worry about it. The money gives you the option of getting things if you want to - and gives you peace of mind that you won't end up in the poorhouse - but "not spending" isn't something to lose sleep over.

 

Finally, regarding the tax issue, if your accounts really aren't enormous, I wouldn't worry about it, and I certainly wouldn't take money from a tax-advantaged account just in case future withdrawals might be taxed at a higher rate, because who knows what will happen? Even if rates rise in general, the brackets at your level might not be affected at all. If you really do want to get some money out, though, and these aren't mandatory distributions, do as one of the other members suggested and roll it over to a Roth - you're paying tax on the distribution either way, so you might as well "buy" a future tax benefit.

 

(Yes, I know many people say "but what if they start taxing Roth distributions in the future??", but I just can't see any Congress enacting something that would rightly be seen as a betrayal of a promise on which millions of people relied - it would be electoral suicide. Ending the program going forward, possible; screwing over people who were already in it - unlikely. Just my view.)

[wwest5829]

21 hours ago, Jingthing said:

OK I do have a specific issue but this can be more general if people are interested.

Many members here are in retirement and have "nest eggs" that ideally should be spent to a reasonable degree  unless their focus is purely on leaving a legacy.

Well as a U.S. national I have a end of tax year issue. 
I am heavily invested in stocks in my retirement account but I don't really need to spend even one dime from it any time soon. 

Why? 

I had a lot of big spending plans before the pandemic but now it's almost hard to spend much money.

Typical financial advice is to withdraw 3 to 4 percent of your nest egg once you're in that phase of your life. 

Often there is advice to cut that down during down markets.

But rarely is there advice about what to do if you don't need any of it.

So the market is really up now and if I defer a larger withdrawal to a later year there would be a taxation hit.

So I'm considering doing the standard 3 to 4 percent withdrawal and just bank the money for future larger expenses.

But the bigger issue here is a problem that isn't talked about much. Not spending enough money. 

Hmm, can’t identify. Pretty well balanced (knock on wood). $1306.00 in US Social Security, Required Minimum Distribution from tax deferred retirement results in $2400.00 USD per month coming to Thailand. Remainder goes to Sons upon my demise. What comes to Thailand, stays in Thailand. Separate Wills delineating disbursement upon croaking ...

[Acharn]

I'm afraid I don't understand what your problem is. If you don't need the money now, just let it pile up in whatever accounts it's going to. If you don't need it now, you may need it later. Medical expenses can wipe out even rich people (well, below the 0.01%, anyway). If you don't have any wish to leave a legacy, let the state take it. After you're dead you aren't going to care. As to the advice to withdraw a certain amount every year, that needs to be modified according to individual circumstances. Why would you withdraw it if you don't need to spend it?

[1FinickyOne]

21 hours ago, Jingthing said:

So I'm considering doing the standard 3 to 4 percent withdrawal and just bank the money for future larger expenses.

I am not a tax expert but the reason not to take the profits would be that you will have a larger principal to compound next year... 

 

Not sure how old you are but at a certain point, different for everyone, it becomes a matter of comfort level of risk... younger people have a longer time frame to recover from downside risk... if that were to happen. 

 

For myself, mostly I don't worry about taxes and just pay them as they come from profits... 

 

When you play the markets there are usually no end to the ways you can kick yourself... but pick a strategy and go with it - I have been curious about the 4% rule too... It is all such a personal and complex subject. Once you get used to a certain level of principal, will you feel badly as the level decreases? Though most years my investments have been earning more than 4%... 

 

I have always had trouble spending on myself.. I mentioned this to a friend and told her I just splurged and bought 'buy one get one' shoes... I told her it is much easier for me to spend on others... she sent me her shoe size... 

[1FinickyOne]

37 minutes ago, wwest5829 said:

What comes to Thailand, stays in Thailand.

Viva Las Vegas!

[Qman]

I work backwards from having a goal of a taxable level of income that takes advantage of lower graduated tax rates and the impact of Medicare Part B tax surcharge levels.  There are income items with limited control like Social Security and then dividends, interest and capital gains in taxable investment accounts.  I look at what is taxable usually in early December and then make a taxable IRA withdrawal to get to the desired level of taxable income for Medicare and taxes in general.  Note RMDs will be the minimum but you can take more.  If I have too much cash after the IRA withdrawal that can be kept for emergencies or invested in a regular brokerage account subject to taxation but you can control the taxable elements.  A good financial plan for retired people is to have access to funds which are fully taxable (IRA), partially taxable with control (regular investment accounts) and nontaxable (Roth IRA).  As a general rule you do not want to unnecessarily understate income and miss out on low tax rates and then wind up having to overstate income in future years and incur higher tax rates so managing within comfortable tax rate ranges is a good goal to work towards.  Having investments in accounts with varying tax implications gives you the ability to manage outcomes. 

[Jingthing]

4 hours ago, khunjeff said:

 

Actually, if you look around in articles and literature related to retirement, this subject does come up fairly regularly - though of course not nearly as often as "running out of money", since "not spending enough" is a much less common problem.

 

There are two issues, usually related: 1) you became accustomed to saving, and can't get out of the habit and switch over to spending mode (or you're just naturally thrifty by temperament); and 2) you're ok with spending, but just can't find anything you want to spend on (especially with Covid, where using money to travel is mostly off the table) - or maybe you've just become a sedentary homebody as you aged.

 

In terms of (1), just try to regularly remind yourself that you have plenty of money to do what you want, and that you're not in danger of going broke. You enjoy wine, but it's a rip-off here? Buy it anyway, you earned it - and these years are what you were saving for all that time. I feel as you do, so I just look for wine that's on sale or remainder or whatever, and try to ignore the fact that even the sale price is double what the wine should cost. I end up drinking wine that isn't as good as what I might drink elsewhere, and at higher prices, but I can afford it, so why deny myself completely?

 

For (2), ask yourself whether there really are things to buy that would make you happy, but that you're not even considering because you're so used to rejecting expenditures. More or more lavish meals out? Nicer hotels when you travel? Business class tickets? If there aren't, don't worry about it. The money gives you the option of getting things if you want to - and gives you peace of mind that you won't end up in the poorhouse - but "not spending" isn't something to lose sleep over.

 

Finally, regarding the tax issue, if your accounts really aren't enormous, I wouldn't worry about it, and I certainly wouldn't take money from a tax-advantaged account just in case future withdrawals might be taxed at a higher rate, because who knows what will happen? Even if rates rise in general, the brackets at your level might not be affected at all. If you really do want to get some money out, though, and these aren't mandatory distributions, do as one of the other members suggested and roll it over to a Roth - you're paying tax on the distribution either way, so you might as well "buy" a future tax benefit.

 

(Yes, I know many people say "but what if they start taxing Roth distributions in the future??", but I just can't see any Congress enacting something that would rightly be seen as a betrayal of a promise on which millions of people relied - it would be electoral suicide. Ending the program going forward, possible; screwing over people who were already in it - unlikely. Just my view.)

Wow. 

A very well thought out post. Thank you very much.

Even in this time of this forum being understandably in a phase of semi-hibernation, it's encouraging that there are a number of people here willing and able to create value here for readers and posters. 

 

On your points:

 

Yes I have seen some articles about people being unable to spend enough, so maybe the word rarely wasn't quite right. But they are definitely in the minority and practicably speaking it is a less serious problem than the fear and reality sometimes of retired people going broke. Leading of course to the legendary Walgreen greeters and nomad Amazon living in your car warehouse sweatshops unplanned return from retirement horror stories, or even total ruin.

 

I think varying psychologies about money, spending, and saving are fascinating and of course conflicts about that are major cause of relationship problems. I grew up with parents raised in the depression (my father was sent away from a big city to a farm so that he could even eat) and then later when they were making good middle class money, their response was serving steak almost every night (boring and unhealthy but a sign of success) and going into debt. I was voluntarily poor in my 20s (a "Bohemian" salad days phase) and then fled to corporate life in my 30s before it was too late. Realizing that if I didn't poverty would become mandatory, not voluntary. That was scary. So then I got to a phase where I was throwing away money, very frequent international travel, leased cars, frequent expensive restaurant meals, purchases of art and expensive furniture (that peaked in a kitchen faucet where the plumber warned me it was so fancy that repairs would cost a fortune, ha ha).

 

Earlier (than planned for) retirement put the breaks on all that. Trying to hold on to the money that I had, and yes, growing more. So I guess that has become a habit hard to break. 

 

The wine example is interesting. If it was at a price I considered even just fair (wouldn't need to be a bargain) yeah I would probably have had it all the time in Thailand. But food particularly restaurant meals is a relative bargain here. So I haven't skimped on that. So there is the combination of shyness about spending mixed with the awareness of what's good value and what's a rip off.

 

Definitely there is less to spend it on this year. I had planned a major trip before that would have been massively expensive and now I feel the need to not cross the border for visa reasons. Was thinking about a condo refurbishment. Don't want a bunch of workers in my home. Dental work? Stressful right now. 

 

The withdrawal decision is not only about possible future tax. It's also about taking out some profits from an up market. But I'll probably just leave it be as I probably won't need an extraordinary withdrawal next year. 

 

Using a Roth is a good idea for many but I don't want to make my finances more complicated and again because of my lower end financial financial level, it doesn't seem worth it. 

 

I agree with you, there is no way they would make Roth taxable.

[LivNon2396]

I been searching and this has been the closest I've found.

 

I am looking for information on those trading in the US Stock Market and have set up an LLC whilst living here in Thailand. 

 

Thank you.

[Jingthing]

Well, while I realize that exactly nobody has been waiting with baited breath to find out what I did about this, I may as well say. After all, I started this topic for feedback about this decision so it feels like I should do the big reveal.

 

I decided to do a last minute 2020 IRA withdrawal of a little over 3 percent of the total. Almost down to the wire, but it's done.

 

Probably mostly based on gut feeling (so much of life is) but the reasons part of it were to take some profits (there are a lot of profits) and as tax defense if it turns out I need a large withdrawal next year.

 

Now I've got the "isn't that special" hard work of trying to spend more money just in time for Pattaya to be locked down again!  

 

[Nout]

On 12/23/2020 at 9:45 PM, Jingthing said:

OK I do have a specific issue but this can be more general if people are interested.

Many members here are in retirement and have "nest eggs" that ideally should be spent to a reasonable degree  unless their focus is purely on leaving a legacy.

Well as a U.S. national I have a end of tax year issue. 
I am heavily invested in stocks in my retirement account but I don't really need to spend even one dime from it any time soon. 

Why? 

I had a lot of big spending plans before the pandemic but now it's almost hard to spend much money.

Typical financial advice is to withdraw 3 to 4 percent of your nest egg once you're in that phase of your life. 

Often there is advice to cut that down during down markets.

But rarely is there advice about what to do if you don't need any of it.

So the market is really up now and if I defer a larger withdrawal to a later year there would be a taxation hit.

So I'm considering doing the standard 3 to 4 percent withdrawal and just bank the money for future larger expenses.

But the bigger issue here is a problem that isn't talked about much. Not spending enough money. 

A shroud has no pockets.

[Jingthing]

1 hour ago, Nout said:

A shroud has no pockets.

No doubt.

Not sure how to respond to that though, so there's this. 

Happy New Year!

 

 

 

[TallGuyJohninBKK]

On 12/23/2020 at 11:52 PM, Jingthing said:

Talking about a classic IRA. Withdrawals are taxed as income.

 

You know, because of the coronavirus, the feds this year changed the law to require NO required minimum distributions from IRA accounts for 2020, even for those who would normally have RMDs. But that's only for calendar 2020, not 2021 ahead.

 

[Jingthing]

6 minutes ago, TallGuyJohninBKK said:

 

You know, because of the coronavirus, the feds this year changed the law to require NO required minimum distributions from IRA accounts for 2020, even for those who would normally have RMDs. But that's only for calendar 2020, not 2021 ahead.

 

I didn't know. However, I'm not in that age bracket but that's definitely useful information for those that are. 

 

Of course for those that aren't aware of those rules, the reason they do that is that traditional IRAs are tax deferred and the IRS wants to force people to eventually pay some tax on those funds.