Retirement questions & tax liability

[ekrampitzjr]

Maybe in the near future the folks in charge will see the crazy amount of money sitting in Roths and pass some silly law and have an ‘IRS distribution fee’ cause that money is no longer taxed ?

Don't laugh. It's been thought of.

Alicia Munnell, who had been appointed to a high-level job in the Treasury Department, proposed nearly 30 years ago taking 15% from retirement accounts. Her reasoning was that not everyone could invest in 401(k)s and IRAs, and we should tax those fortunate enough to have those accounts to reduce the deficits and to invest in infrastructure for "our future"—the kids.

She went further than the one-time 15% levy by actually proposing that annual gains in retirement accounts should be taxed as regular income then, not deferred. Imagine your IRA growing by $10,000 one year, but you have to pay (say) 25% of that when you file your taxes for the year, even though you might not be able to touch the money in the account. She subscribed to the theory that any income exempted from tax is actually a type of government tax expenditure itself. Your receiving a $1,000 tax break was the same in her eyes as the government paying you $1,000.

The Wall Street Journal and others blew the whistle on her schemes then and kept them from passing. But consider what I mentioned in another post about the proposal to make 529s just another taxable savings account. The same "justifications" were given.

That mentality is out there, folks. Keep in mind the Roth variants of IRAs and 401(k)s came along later. Who knows what someone could dream up for those.

 

[Cujet]

Can you elaborate on this? You’ve contributed the max to a 401k or a Roth IRA and are nearing retirement and somehow only have $35k. I feel like that would almost be impossible unless you had everything tied up in one or two individual companies and they went under.

Neither. My company does not offer a 401K and I earn enough to be well into the top tax bracket. So a Roth makes no sense. I'd rather pay taxes on whatever I withdraw when I retire, at the lowest tax rate.

I was simply saying that my personal IRA was mismanaged by big firms. And that it never recovered from multiple economic downturns.

I am well situated for retirement. However, the IRA was not successful. I named 2 companies (American Express-Ameriprise and UBS) as companies that mismanaged my funds.

There is a reason this is funny:

 

[RhondaHonda]

Neither. My company does not offer a 401K and I earn enough to be well into the top tax bracket. So a Roth makes no sense. I'd rather pay taxes on whatever I withdraw when I retire, at the lowest tax rate.

I was simply saying that my personal IRA was mismanaged by big firms. And that it never recovered from multiple economic downturns.

So what was the max that you contributed If it wasn’t a 401k or Roth?

I am well situated for retirement. However, the IRA was not successful. I named 2 companies (American Express-Ameriprise and UBS) as companies that mismanaged my funds.

There is a reason this is funny:

So what was the max you contributed if it wasn’t a 401k or a Roth? Just a traditional IRA?

 

[Cujet]

So what was the max you contributed if it wasn’t a 401k or a Roth? Just a traditional IRA?

Conventional IRA, the max by year and age. I started my aviation career in 1986, Started working in the automotive industry and marine in 1979. I don't recall what the contributions were back then, but it was more painful then then now. I typically chose "modest risk". Which was considered to be large American companies.

In the end, I may try to write off the losses at retirement and close out the account. While not nothing, it's not even enough to purchase a retirement Hyundai.


EDIT: I thought I'd add that I can make good money by working hard, no problem. But I've never been able to have somebody else make significant money for me. That is the story of my life.

 

[wpod]

I am 69 and the wife is 65 each year I pay more and more in taxes each year, We are feeding the Beast. Last year my wife said with an envolope in hand " I could have my kitchen remodeled with what we pay in taxes." Tax deferral ? Pay the taxes a little bit each year or pay them all at once. Been retired from a real job since I was 48. What most miss is the economic boom/bust economic cycle happens to bust when you need the money most. Debt is the killer. Something that returns an income is a good thing to have to buffer the spend down of the stock portfolio/ ira / 401k etc.

 

[wpod]

This is top dollar advice. @Astro14 should be charging top dollar as a financial advisor here, but you get it for free!

Astro14 is a brilliant man. With out brilliant peoples advice I would be a huge zero. Listen to brilliant peoples advise , it is better than listening to the advice of the uninformed. A few years ago a friend asked me about some commercial rental property investment advice, her friend Mickey gave her some advice and I responded Mickey is ghetto poor ask advise from people that are accomplished.

 

[wpod]

Completely agree. When I opened my first IRA, over 30 years ago, the contribution limit was $2,000. Not nearly enough.

Even at triple that, it’s not nearly enough.

There is never enough. I am fairly simple in all ways and more seems usually better

 

[zzyzzx]

PA does not tax pension income in any way.

So 401K withdrawals, pension, and SS are state income tax free? That's almost how Georgia works, except the tax free part is limited to 65K and (I think) not adjusted for inflation. The issue in both cases is that things like capital gains distributions and dividends on taxable accounts will still be taxed.

 

[ChiTDI]

Believe it or not, tax hungry Illinois doesn’t tax any retirement income either. That includes pension,( gov and commercial), Social Security, IRAs, 401k and 403b.

 

[Sam_Julier]

So 401K withdrawals, pension, and SS are state income tax free? That's almost how Georgia works, except the tax free part is limited to 65K and (I think) not adjusted for inflation. The issue in both cases is that things like capital gains distributions and dividends on taxable accounts will still be taxed.

Yes.

 

[99Saturn]

I sometimes wonder if this tax issue truly exists. One can't get that much into their Roth in the first place. And it's beyond impossible to guess the future.

Now maybe some time later a backdoor Roth conversion could come into play, that is something I don't understand, but one would have to have money in the 401k/403b in order to pursue that.

One can convert a traditional 401k to a Roth IRA when they leave their job (not backdooring just a Roth conversion). Granted, your taking the tax bill on the chin depending on what is going on when you convert but you can cram a lot of dollars into a Roth that way.

There are also Roth 401ks out there so just you could have a couple putting $58K a year in 2023 away in Roth accounts just by maxing (no catch up contributions).

 

[99Saturn]

$100 invested at 7% interest for 100 years will become $100,000, at which time it will be worth absolutely nothing.

Here's a different view, same $100 invested in various sources, note the value if invested in the S&P ... not quite 100 years only tracks back to 1928.

https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html