Tax Time

[Nowisee]

It’s that lovely time of the year where all some of us from the usa get corn-holed by Uncle Sam.

Most years my taxes are fairly simple, Turbo Tax Premier usually handles it and there might be a head scratching moment or two, but usually no more than a few hours and e-file it goes.

This year I had to dive into the IRS publications, forms, worksheets, tables, appendixes, etc. to calculate Required Minimum Distributions (RMD) for proceeds I received from a beneficiary traditional IRA.

It wasn’t even enough to be worth the headache and 50% tax penalty…I would have been happier donating the whole damn thing to an animal charity, but that would have been another headache.

These IRS publications are a ClusterF, they are baffling and I can only imagine government accounting lawyers sitting around getting GS-15 pay writing this crap and corporate lawyers sitting around getting paid $600/hour figuring out ways to dodge it.

WHO writes this shit? Any of you out there take responsibility? First beers on me… 5555

[Thanyaburi Mac]

Snailed my 1040 in last Saturday, with a "smile" of sorts. Happily I don't have to read too much of the BS in the instructions and guides, and don't really make enough to be of interested to the Infernal Revenue Service to rate an audit.

Mac

[gk10002000]

RMDs are a pain. I strongly suggest that once you get to the point where you need to do them, you take all the money out, suck up the taxes, and put what is left into a ROTH IRA. Roth IRAs do not have any RMDs, which Traditional IRAs have. Good bad or indifferent, this will mean you only have to deal with the RMD once, won't have to report the traditional IRA withdrawals year after year, etc.

[Nowisee]

Snail Mailed from Thailand?

[Thanyaburi Mac]

Yes, snailed via Thai Post, regular airmail, have done so for 20+ years, never gone astray.

Mac

[skatewash]

RMDs from inherited traditional IRAs are a pain in the rear if you have to do it by yourself. However, a good custodian, for example, Vanguard, will do it for you. They will figure out what the RMD needs to be and allow you to establish an annually recurring RMD that will satisfy IRS requirements. It's a do-once-and-let-it-be type of thing that can be set up online.

https://personal.vanguard.com/us/whatweoffer/accountservices/requiredminimumdistribution

Edit: forgot to mention it's a free service. Also, forgot to mention that if your current custodian does not offer this service moving the IRA from your present custodian to another is a fairly painless procedure, just contact your new custodian and they will either do it for you or help you to do it.

Edited April 2, 2016 by skatewash

[Nowisee]

Good to know about the mail thing. I was going to have a friend mail it for me in the US. Just send her the PDF.
But turns out I was able to do some things on TT to get it to do what I wanted, e-file worked ok... and it debited my account what I owed.

The RMD thing was a huge mistake on my part going back several years. I just liquidated the account, paid the 50% tax penalty and filled out the waiver request attached to the 5389?? form. Anyway, that headache is hopefully gone now.

[Langsuan Man]

RMDs are a pain. I strongly suggest that once you get to the point where you need to do them, you take all the money out, suck up the taxes, and put what is left into a ROTH IRA. Roth IRAs do not have any RMDs, which Traditional IRAs have. Good bad or indifferent, this will mean you only have to deal with the RMD once, won't have to report the traditional IRA withdrawals year after year, etc.

Why should you suck up the highest tax rate for the one time convenience of switching over to a Roth just to save yourself some trouble doing simple math (if your IRA custodian won't do it for you, most will )

You take your total IRA value and then go to the life expectancy chart and divide the total by your expected life time and pay that amount, which in most cases won't jump you into a much higher tax bracket

Converting to an Roth at a time close to your RMD date is going to put you into the highest tax bracket there is, not to mention if your are paying for Medicare Part B, that will increase your next years monthly payments considerably

That is like people who have a lot of withholding taken out so that they don't have to pay taxes at the end of the year, thus giving the USG a free loan every year

It's your money so do with it what you will, I just try and to keep as much as possible for myself

[skatewash]

RMDs are a pain. I strongly suggest that once you get to the point where you need to do them, you take all the money out, suck up the taxes, and put what is left into a ROTH IRA. Roth IRAs do not have any RMDs, which Traditional IRAs have. Good bad or indifferent, this will mean you only have to deal with the RMD once, won't have to report the traditional IRA withdrawals year after year, etc.

Why should you suck up the highest tax rate for the one time convenience of switching over to a Roth just to save yourself some trouble doing simple math (if your IRA custodian won't do it for you, most will )

You take your total IRA value and then go to the life expectancy chart and divide the total by your expected life time and pay that amount, which in most cases won't jump you into a much higher tax bracket

Converting to an Roth at a time close to your RMD date is going to put you into the highest tax bracket there is, not to mention if your are paying for Medicare Part B, that will increase your next years monthly payments considerably

That is like people who have a lot of withholding taken out so that they don't have to pay taxes at the end of the year, thus giving the USG a free loan every year

It's your money so do with it what you will, I just try and to keep as much as possible for myself

Time spent taking care of my RMD every year with Vanguard: 2 minutes entering the 1099-R I receive from Vanguard into TurboTax. That's it. Done for another year. If your traditional IRA custodian won't do the same for you, you need to find a new IRA custodian. Your new IRA custodian will do almost all the work for you with your authorization. It's in their interest to help you in order to get your business.

[gk10002000]

RMDs are a pain. I strongly suggest that once you get to the point where you need to do them, you take all the money out, suck up the taxes, and put what is left into a ROTH IRA. Roth IRAs do not have any RMDs, which Traditional IRAs have. Good bad or indifferent, this will mean you only have to deal with the RMD once, won't have to report the traditional IRA withdrawals year after year, etc.

Why should you suck up the highest tax rate for the one time convenience of switching over to a Roth just to save yourself some trouble doing simple math (if your IRA custodian won't do it for you, most will )

You take your total IRA value and then go to the life expectancy chart and divide the total by your expected life time and pay that amount, which in most cases won't jump you into a much higher tax bracket

Converting to an Roth at a time close to your RMD date is going to put you into the highest tax bracket there is, not to mention if your are paying for Medicare Part B, that will increase your next years monthly payments considerably

That is like people who have a lot of withholding taken out so that they don't have to pay taxes at the end of the year, thus giving the USG a free loan every year

It's your money so do with it what you will, I just try and to keep as much as possible for myself

Your assertion that converting to a Roth puts you in the highest tax bracket is very not necessarily true. You also don't seem to account for the fact that the money now in the ROTH can now be invested and grow completely tax free and you seem to ignore that one would never have any more tax liability. You are stacking the case. I do appreciate the note about Medicare Part B payment linkage.

[Thanyaburi Mac]

Just paid my first installment of 2016 Estimated Tax online, right handy, only took about five minutes.

That's the 1040ES

Mac

[bendejo]

OP, thanks for the heads up on the RMD stuff. I'll try to close off the IRA account before I turn 70.

[gk10002000]

I would add that taking RMDs of course in general means you now have income which can incur a tax liability and if you are getting social security may affect how much of your social security is taxed.

[Langsuan Man]

I would add that taking RMDs of course in general means you now have income which can incur a tax liability and if you are getting social security may affect how much of your social security is taxed.

No, IRA distributions of any kind are not counted towards Social Security Income limits. Only wages paid during a tax year have any effect on Social Security income and even after a certain age wages are not counted ( 70 I think)

Only 80% of your Social Security income is subject to Federal Income Tax

[CaptHaddock]

RMDs are a pain. I strongly suggest that once you get to the point where you need to do them, you take all the money out, suck up the taxes, and put what is left into a ROTH IRA. Roth IRAs do not have any RMDs, which Traditional IRAs have. Good bad or indifferent, this will mean you only have to deal with the RMD once, won't have to report the traditional IRA withdrawals year after year, etc.

Why should you suck up the highest tax rate for the one time convenience of switching over to a Roth just to save yourself some trouble doing simple math (if your IRA custodian won't do it for you, most will )

You take your total IRA value and then go to the life expectancy chart and divide the total by your expected life time and pay that amount, which in most cases won't jump you into a much higher tax bracket

Converting to an Roth at a time close to your RMD date is going to put you into the highest tax bracket there is, not to mention if your are paying for Medicare Part B, that will increase your next years monthly payments considerably

That is like people who have a lot of withholding taken out so that they don't have to pay taxes at the end of the year, thus giving the USG a free loan every year

It's your money so do with it what you will, I just try and to keep as much as possible for myself

Your assertion that converting to a Roth puts you in the highest tax bracket is very not necessarily true. You also don't seem to account for the fact that the money now in the ROTH can now be invested and grow completely tax free and you seem to ignore that one would never have any more tax liability. You are stacking the case. I do appreciate the note about Medicare Part B payment linkage.

You are correct that doing a one time Roth conversion of your entire TIRA assets would not necessarily put you in the highest Federal bracket for that year. It depends on how large your TIRA is and what your other income is. However, it's likely that a one-time conversion would put you in a higher bracket. For most taxpayers during the years after they stop working and before they start receiving Social Security and RMDs, they are likely to be in the lowest bracket of their taxpaying years. If that is the case, the smart move is to convert your TIRAs each year before 70 up to the top of your current bracket insuring that you are paying for the conversion at the likely lowest rate you will ever have and before the RMDs kick in which could very well put you into a higher bracket. Intuition is not very reliable here since there are so many factors.

I have done my retirement planning since well before retiring with the Esplanner from esplanner.com, which is the most comprehensive financial planning software for the consumer market. I as able to test delaying Social Security until 70 vs. starting at 62, converting the TIRAs all at once to Roth or gradually before 70, moving abroad vs. remaining in New York, and all combinations of these and other variables. I have run hundreds of scenarios all of which account carefully for the special benefits of the Roth. The strategy I just described is optimal for me and many people like me. The previous poster was not "stacking the deck." He was assuming that your financial position is not at some extreme.

Here's a way to understand the benefits of the Roth conversion in an intuitive way. But bear in mind that intuition is not sufficient. You have to run out calculations on your own situation.

The value of the Roth depends on many factors, the most important of which is the expected lifetime of the Roth IRA itself. If you're single with no kids, then the life span of the Roth is your own life span. If you have kids or perhaps a younger wife, then the life span of the Roth could be longer by decades. (I expect my Roth to be feeding my wife fifty years from now.) That investing horizon is the period of time that the converted Roth has to earn back the tax paid on the conversion. Of course, the higher the tax rate at the time of conversion the deeper the hole from which the Roth has to dig itself out. If you are single and in a tax bracket higher than 15% converting to a Roth may not pay off at all since you are fairly likely to take distributions at about the same rate that RMDs would mandate for a TIRA.

I have done multiple Esplanner scenarios for a wealthy friend who is 68 now and in the highest bracket. She has an older husband and no kids. A Roth conversion is unlikely to improve her financial situation.

[JimGant]

I would add that taking RMDs of course in general means you now have income which can incur a tax liability and if you are getting social security may affect how much of your social security is taxed.

No, IRA distributions of any kind are not counted towards Social Security Income limits. Only wages paid during a tax year have any effect on Social Security income and even after a certain age wages are not counted ( 70 I think)

Only 80% of your Social Security income is subject to Federal Income Tax

Two parts to this. Yes, if you take SS before full retirement age (66), you'll be penalized for working, i.e., having earned income -- by having SS benefits reduced by 1$ for every 2$ earned above $15,720. Unearned income, like an RMD distribution, doesn't figure into this equation.

But, SS benefits can be taxed, up to a max of 85%, with the rate increasing the more your "Modified Adjusted Gross Income" figure increases above a baseline ($25k for single filing, $32k for joint filing).[MAGI = AGI plus tax exempt income plus one-half your SS benefit.] For example, for a joint return with a $25k pension, an SS benefit of $12k, and $1k in tax exempt interest -- the MAGI is right on the cut line of $32,000, meaning none of the $12k in SS benefits are subject to tax. However, add a $4,000 RMD to that MAGI, and the taxable amount of your $12k SS benefit becomes $2,000; an $8,000 RMD has $4,000 of your SS benefit now taxable. The effective tax rate on your RMD, at least in these examples, has increased by 50%. Ouch! Of course, if you've already maxed out your taxable SS benefit at 85%, there is then no added effective tax rate to your RMD.

Anyway, something further to consider in the Roth vs. RMD analysis.

[gt162]

I hope I can use Turbo Tax or TaxAct online to do my taxes in Thailand.

[OJAS]

Yes, snailed via Thai Post, regular airmail, have done so for 20+ years, never gone astray.

Mac

I have also been snail mailing my UK tax returns to the jolly old taxman in HMRC back home via Thailand Post, again with no delivery problems. Might be advisable to use their International EMS service, though, even at a cost of 950 THB (to the UK at any rate), to enable you to track delivery progress.

[55Jay]

I hope I can use Turbo Tax or TaxAct online to do my taxes in Thailand.

You can.

[Thanyaburi Mac]

Those nice folks at IRS make it easy to pay your 1040ES Estimated Tax, if you choose to do so, online:

https://www.irs.gov/payments

Just did my payment #2 for 2016.

Mac