The 10-year rule applies, but no RMD’s. In other words, kids can let the money continue to grow for 10 years after which they have to cash it and close the Roth account. (The reason is the Govt does not want the kids to continue to enjoy tax-free growth more than 10 years.)
9 Likes
This is my understanding also.
Reminder - RMD tax pain is mostly only relevant for folks with jumbo unspent taxable IRA balance(s) still left at age 72. RMD percentages (rounded) at sampling of ages:
* 72 4% ie $4k per $100K
* 80 5%
* 90 8%
* 100 16%
In this group, it would be a more common concern than with the average American retirees.
Full table
1 Like
Lets dive into the weeds some more - NUA.
If anyone has highly appreciated company stock inside a 401k plan:
https://www.fidelity.com/learning-center/personal-finance/retirement/company-stock
That’s what I thought!
Didn’t the SECURE act update the RMD start age to 73 starting in 2024, and in future years to 75?
Folks…I’m older than dirt. I need to start RMDs this year.
7 Likes
Depends on how old you are.
If you self identify as being older than dirt, then Secure Act 2.0 may not benefit you.
5 Likes
For those questioning the wisdom of Roth conversions…one other aspect to consider is the tax implications on the RMD of the second to die. The RMD will be the same as it had been when both spouses were alive (give or take, depending on age of deceased spouse and remaining spouse, but let’s call it even). However, the surviving spouse will be in the single tax bracket with an income that is almost the same as when the couple had filed as MFJ. SS payment will decline, but RMD and dividends & interest should be similar.
Potential IRMAA impact as well as lower tax brackets (and higher tax liability).
That still does not mean that Roth conversions make sense, but this is one more factor to consider. Each person needs to evaluate her own situation.
I am encouraging my recent grads to aggressively fund their Roth 401Ks and only wish they could contribute more than $23K limit (plus $7K in Backdoor). While they are in fairly high marginal brackets today, it is difficult to imagine that they won’t be in higher brackets in the future.
5 Likes
It takes 1 minute to understand the rule and then a lifetime to remember all the exceptions to the rule.
4 Likes
One of our kids will have a HUGE jump in income in a year. That kid is funding as much as possible into a Roth now before the tax bracket takes a HUGE jump. Will continue to fund the Roth, but will also more aggressively fund tax deferred retirement accounts.
The other kid has been funding both a Roth and tax deferred for a long while…can’t do the max per year, but every penny counts.
6 Likes
SO TRUE!
And the entire selling a house within two years of death of first spouse, step-up in basis, claiming $500K vs $250K. I have to refresh myself on the rules whenever a friend or family member’s parent dies. (I am not a professional.)
I must be one of the younger ones on this topic. I dont qualify for the 55 + active communities yet.
However, I am getting invitations in the mail for free dinners hosted by financial advisors.
6 Likes
Why fund the tax deferred at all if the child cannot manage the max? I am guessing that means he is in a slightly lower tax bracket than the other one.
I tried explaining to my child why I thought all 401K funds should go to 401K Roth, but it wasn’t until I typed it out with charts and examples that the lightbulb went off.
1 Like
If you reached 73 last year, you are still under the old 72 rule. I takes 10 years (2033) to get to 75.
2 Likes
I understand why people who are paying a high tax rate now might decide to invest in a non-Roth 401K instead of a Roth 401K. Personally, even though we had a high tax rate, as soon as we had the option to go Roth, we did, thinking that we had the money to pay the taxes now, while we were working at the top of our pay scale, and marveling at the beauty of tax free growth and disbursements in the future.
However, for people with extra money to invest, regardless of what they do with the 401K, they really need to find extra ways to invest in Roths. For example, if your income is low enough, you can invest in a Roth IRA every year. If your income is too high, you can do a back door Roth. And my favorite is the mega backdoor Roth, regardless of your income. I’d only do these if I don’t have non Roth IRAs, because there are tax consequences.
When we were working, we were putting away around 20K each in the back door and mega back door Roths. If you have the extra money, this is such a bonus. When are you ever going to get the chance to invest like this again?
4 Likes
At this point in life, higher income (higher taxes) closer to retirement (within 10 years), it doesn’t seem to make sense to contribute to a Roth and pay substantial taxes now to avoid paying what would be lower taxes later. I completely understand a younger person in a lower tax bracket taking advantage of the Roth to save an amount that they would effectively be paying more taxes on later. That’s not me though.
I also don’t see paying much higher taxes now to save money that will be tax free later (Roth) when I can essentially do the same thing early in retirement, when my taxes will be much lower, by converting then.
As I stated above, if I put funds into a Roth 401k now I am paying over 30% in taxes on that money. That’s a big tax hit now. With traditional I am deffering that tax hit until later in life when my effective tax rate should be well below that so I’ll end up paying less tax on that money in the end.
What I think does make sense for me personally is to convert some of those traditional 401k funds to Roth in the early years of my retirement when again my tax rate will be less than it is now. If nothing else I’ll be paying taxes at the lower effective tax rate on those conversions and not at my top marginal rate as I would have to now. But in actuality I’ll also be earning less so my marginal tax should also be less and that’s an ideal situation in my mind. Why pay over 30% in marginal taxes now when I can do the same thing in less than ten years and pay a much lower effective tax rate of say 15%?
I hope to retire and delay social security for at least a few years while pulling money from my 401k to live on and potentially up to a certain amount to convert to Roth. I should have very little other income so I’ll be able to use these lower income years to pay much less in taxes. I just can’t seem to see how this doesn’t make more sense than paying higher taxes now (later in life, higher income).
My.main goal now is to contribute to my traditional 401k up to the maximum including my “catch up” contributions. This seems to make the most sense to me.
4 Likes
I think you missed my last two paragraphs.
No, I saw those. I’m still not convinced a Roth investment at this point is the right choice for me for tax purposes.
I don’t necessarily have “extra” money to be contributing. That’s why I feel maxing out my traditional 401k is the right choice at this point.
You don’t “necessarily” have the money to contribute. But then again, maybe you do? If at any time in my life I realized that I could invest money and never, ever pay taxes on the gains, I would find the money somehow.
I’ve written this a couple of times on this thread, but I’ll write it again. We invested less than 20K in an IRA many years ago, converted it to a Roth when it was worth 150K (painful), it’s worth over 860K now (and we have pulled money from it). Will never pay taxes on these gains. A Roth is magical. It’s well worth finding the money somehow, working extra, cutting back, whatever one needs to fund it.
5 Likes