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IRA and 72


TAXMAN
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I'm in that situation too.  I plan to contribute.  My understanding is that the tax rules changed for contributions when they raised the age to 72for RMDs.  If you are working and have earnings, you are now eligible to continue to contribute and get the IRA deduction.

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Depending on overall situation, have you considered Roth IRA contributions?   That should not affect the RMD for future years and should qualify for the same investment opportunities.  The difference would be the destructibility of the contribution, which might or might not be significant.

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12 hours ago, TAXMAN said:

TP taking IRA rmd(tp is 72). TP still working and wants to put $ in IRA(better earnings than regular bank accounts). See any problem with this? I realize that TP's  rmd will change each year because of this.

If your taxpayer is charitable, and uses the standard deduction, have the RMD go to charity as a QCD.

Tom
Longview, TX

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1 hour ago, BulldogTom said:

If your taxpayer is charitable, and uses the standard deduction, have the RMD go to charity as a QCD.

That doesn't work too well for those still wanting to make contributions after 70 1/2. The QCD is limited to the excess of amount contributed after 70 1/2.  If someone puts 7K in a traditional, only the QCD over 7K qualifies for exclusion. 

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2 hours ago, Gail in Virginia said:

Depending on overall situation, have you considered Roth IRA contributions?   

Roth's are awesome.  Rarely does it make sense for someone in a 12% marginal bracket to contribute to a Traditional.  Distributions will likely make more SS taxable, so a 12% marginal rate in retirement years will have an effective rate of 22.2% (12 x 1.85)

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Kathy, let me understand. I'm old, have different types of IRAs (Traditional, Roth, SEP, and Simple), and give to charities. I can make a QCD of $100,000. My RMD is maybe $25,000. I direct my broker to send $25,000 from my TIRA directly to my church and a handful of other charities. I will show NO income from my RMD on this year's tax return.

But if I contribute $7,000 to my Traditional IRA this year and do the above, I will exclude only $18,000 from my income and show $7,000 taxable income from my RMD.

What happens if I contribute $7,000 to my Roth IRA instead? Do I exclude the full $25,000 I had sent to charities from my Traditional IRA?

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4 minutes ago, Lion EA said:

But if I contribute $7,000 to my Traditional IRA this year and do the above, I will exclude only $18,000 from my income and show $7,000 taxable income from my RMD.

Correct.  However, the 7,000 taxable income will be offset by the 7,000 traditional deduction.

5 minutes ago, Lion EA said:

What happens if I contribute $7,000 to my Roth IRA instead? Do I exclude the full $25,000 I had sent to charities from my Traditional IRA?

Yes.

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24 minutes ago, Lion EA said:

Thanx, Kathy.

Well, I may have misspoke.  I remember after SECURE act came out, there was talk of this.  https://www.kiplinger.com/article/retirement/t054-c000-s004-secure-act-changes-squeeze-qcds.html

However, when I test it in my software, it excludes the full 25K and then deducts 7K for IRA.  Also, I'm not finding any mention of it in 590B.  

So, who knows!  :(

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3 hours ago, kathyc2 said:

Roth's are awesome.  Rarely does it make sense for someone in a 12% marginal bracket to contribute to a Traditional.  Distributions will likely make more SS taxable, so a 12% marginal rate in retirement years will have an effective rate of 22.2% (12 x 1.85)

50% of Americans retire with about $250k in retirement assets or less. They would be better off with a traditional IRA because most likely their IRA distributions (if timed properly) would achieve $0 in taxes or very little. My in-laws retired with those type of funds and never paid a dollar in income taxes after retiring at 62. He could have easily had more like $350,000 because he ran out of retirement funds at 82 years of age.

Did the taxes for a lady about 2008 and she did a Traditional to Roth conversion and paid taxes on her distribution (while she was still working). When I told her this she yelled at me - not her CFP who suggested it.

Blanket statements rarely work, you need to look at the situation and run the numbers. I have another client who doesn't have an IRA but his money is invested in dividend paying stocks (all qualified) and some muni bonds. He also pays $0 in federal tax (he does owe at the state level). He has a very comfortable retirement. Investing in a Roth IRA could have benefited him (avoid potential capital gains realizations) but he never sells so it doesn't matter.

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27 minutes ago, mcbreck said:

50% of Americans retire with about $250k in retirement assets or less. They would be better off with a traditional IRA because most likely their IRA distributions (if timed properly) would achieve $0 in taxes or very little. My in-laws retired with those type of funds and never paid a dollar in income taxes after retiring at 62. He could have easily had more like $350,000 because he ran out of retirement funds at 82 years of age.

Did the taxes for a lady about 2008 and she did a Traditional to Roth conversion and paid taxes on her distribution (while she was still working). When I told her this she yelled at me - not her CFP who suggested it.

Blanket statements rarely work, you need to look at the situation and run the numbers. I have another client who doesn't have an IRA but his money is invested in dividend paying stocks (all qualified) and some muni bonds. He also pays $0 in federal tax (he does owe at the state level). He has a very comfortable retirement. Investing in a Roth IRA could have benefited him (avoid potential capital gains realizations) but he never sells so it doesn't matter.

I've thought from the beginning the biggest benefit of the Roth is for people who will never need the money themselves and have a long time horizon for the investments.  Let it grow tax free and leave it to heirs tax free.  Most people think the opposite.  They hear 'tax free' and take it now, think short term.

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19 minutes ago, Randall said:

I've thought from the beginning the biggest benefit of the Roth is for people who will never need the money themselves and have a long time horizon for the investments.  Let it grow tax free and leave it to heirs tax free.  Most people think the opposite.  They hear 'tax free' and take it now, think short term.

I'd tend to agree with you. I'm reluctant to make large tax payments today to benefit from lower taxes when I'm 80 years old and may have medical expenses to wipe out the tax bill. JMO. I also think if you have something like $200k saved for retirement, you are better off spending all $200k and delaying SS as long as beneficial to lock in the highest payment possible.  Most people look at it in the exact opposite way.

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3 hours ago, mcbreck said:

50% of Americans retire with about $250k in retirement assets or less. They would be better off with a traditional IRA because most likely their IRA distributions (if timed properly) would achieve $0 in taxes or very little.

It depends.  Use the 250K amount in traditional IRA's.  Say it's in good mutual funds earning 7% on average.  The RMD percentage does not reach 7% withdrawal requirement until age 87.  That means if the person only takes RMD, the IRA will keep growing until age 87, which using these numbers will be in the 342K vicinity.  If the owner dies without a spouse at age 87, thanks to SECURE eliminating stretch rules, the beneficiary will be taxed on this entire amount over a 5 year period.  Doubtful that will still be $0 tax.

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Back when IRA accounts were first created there was no Roth IRA account. In retrospect If I had been able to contribute to a Roth back then I would have NEVER contributed to a regular IRA account. The line back then was something like "You get a tax deduction by contributing now and on retirement you will likely withdraw your earnings at a reduced tax rate". I am sure that rang true for many. For me my RMD's place me in a higher marginal tax bracket. Frankly I would have been better served by simply buying regular mutual funds and paid the tax. All my capital gains in my IRA accounts are taxed at my highest rate instead of the 15% or 20% that would otherwise be the case. If they came from a Roth no tax. 🙁 If I were a young taxpayer just getting started the Roth is the way to go. 

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The withdrawal rules with a few exceptions require non spousal beneficiaries to withdraw all funds over a ten year period in whatever amounts they elect as long as it exhausts the account. I have a lucky client who stashed away over $1,000,000 in her accounts and about fainted when she found out her only child will have to withdraw it over ten years instead of over her estimated life time. So much for following the established rules and then Wallah Congress scuttles them and changes the facts.

 

 

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20 hours ago, kathyc2 said:

Well, I may have misspoke.  I remember after SECURE act came out, there was talk of this.  https://www.kiplinger.com/article/retirement/t054-c000-s004-secure-act-changes-squeeze-qcds.html

However, when I test it in my software, it excludes the full 25K and then deducts 7K for IRA.  Also, I'm not finding any mention of it in 590B.  

So, who knows!

You are correct - it's in the law.  You must reduce QCDs by any IRA contributions made after 70 1/2 (it is cumulative - not just this year's contributions).  The recently released draft 590B has a confusing worksheet for QCDs that is not well explained.  It's not surprising that it's not yet implemented in the software.

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Interesting since this only applies to IRA Contributions. If you are still working and participating in a SIMPLE Plan or 401 k, maxing out the annual contribution limit,

there is no restriction or limitation. Not a very equitable application of tax law.🙄

 

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20 hours ago, cbslee said:

Interesting since this only applies to IRA Contributions. If you are still working and participating in a SIMPLE Plan or 401 k, maxing out the annual contribution limit,

there is no restriction or limitation. Not a very equitable application of tax law.🙄

 

QCD's are only available from Traditional IRA's, so in that respect it makes sense.  Between IRA's, 401k, 403b, etc there are probably a dozen different ones.  All similar but each with it's own quirks.  It's been a pet peeve of mine for quite some time.  If they want to simplify taxes, I wish they would start here and stop messing with changing where things are at on forms.  

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Or, Roth contributions, right?

I'm well over 70.5, have started making QCDs to lower my taxable RMDs, paused my own contributions for a couple years now, but want to make 2021 and 2022 contributions to my Roth again. Or maybe to my SEP. I wasn't using my SEP when my very part-time employee became eligible but did NOT want a SEP. I no longer have employees, so I can again contribute to my SEP.

I agree with Kathy, too many choices that are similar but each with different requirements. I have a partnership client with a SEP and a partnership client with a SIMPLE and an S-corp client with a SEP and an S-corp client with a SIMPLE, and they all have differences on how the employer reports them depending on both the type of plan and the type of entity. We need more uniformity on something as basic as retirement savings. (But we all know how "helpful" the uniform definition of a child is.)

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