Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
FYI: EVERY YEAR, MANY SENIORS needlessly incur hefty penalties or overpay their taxes. The reason: They don’t understand the strict rules that govern removing money from their tax-deferred retirement accounts. Regards, Ted http://www.humbledollar.com/2017/09/late-thatll-cost-50/
From a recent read: Roth IRAs (as well as H.S.A.) aren’t subject to the required minimum distributions (RMDs) that apply to most retirement accounts starting at age 70½, so you can let any Roth (and H.S.A) assets continue to benefit from potential tax-free growth for the rest of your life. (T Rowe Price quote).
FYI: -Roth IRAs are inherited tax free. -H.S.A are taxable when received as a non-spousal inheritance. -Interestingly, Roth 401K account do have RMDs.
I have a few personal strategy for dealing with RMDs. Consider strategically spending down these taxable IRA dollars first rather than raiding taxable accounts, Roth accounts or Health Savings Accounts, especially between the years of 59.5 and 70.5.
Fund an H.S.A: -Between the age of 59.5 and 65 (when you become medicare eligible) distribute a portion of your tax deferred IRA yearly equal to your maximum H.S.A contribution. This will provide a funding source for my H.S.A as well as make these IRA distributions tax free since there tax liability will be offset by the H.S.A contribution (income tax credit) for that same year.
Fund Itemize Medical Expenses: - Between ages (65 -70.5) track medical expenses that are eligible as an itemized tax deduction. Do not use your H.S.A dollars during this time frame to pay for these medical costs. Instead, pay all of these medical expenses with yearly IRA distributions. Using IRA distributions as the funding source for medical related expenses may potentially lowering your taxes on these taxable distributions.
@Maurice, I believe this is considered a stretch IRA (inherited) which used your age at inheritance to determine your lifetime RMDs. Your beneficiaries of this inherited IRA will receive it as a lump sum when you pass and be required to pay taxes in the year they receive it. The stretch goes away.
I'm still looking for a primary source (i.e. tax code, or even IRS) on this. Best secondary sources I've found so far suggest that the "successor beneficiary" simply continues the same distribution schedule. No lump sum is required.
After an individual retirement account (IRA) owner dies, an IRA beneficiary [e.g. Maurice] may want to name a successor beneficiary to receive his/her remaining share of inherited IRA assets when he/she dies.
Nonspouse is Original Beneficiary of a Decedent’s IRA: A successor beneficiary continues using the existing single life expectancy payout schedule or the original five-year period, whichever was elected by the original nonspouse beneficiary [e.g. Maurice].
What are the rules when you inherit an inherited IRA?
Jim dies and names [Maurice] as his beneficiary on the beneficiary form. Five years later [Maurice] dies and has named Phyllis, who is a successor beneficiary, on the beneficiary form.
When Phyllis inherits the IRA five years later, she simply picks up the life expectancy factor where [Maurice] leaves off.
@bee - we've had exchanges on these things before. If these particular strategies work for you, more power to you. They do seem to carry some assumptions that may not apply to some other people, so they're worth pointing out.
I have a few personal strategy for dealing with RMDs. Consider strategically spending down these taxable IRA dollars first rather than raiding taxable accounts, Roth accounts or Health Savings Accounts, especially between the years of 59.5 and 70.5.
I'm guessing you're doing this to keep RMDs manageable, i.e. not growing so large that they kick you into a higher tax bracket.
Say you need $20k/year. You seem to be suggesting that you withdraw approx $23.5K (so that after paying 15% tax, you've got your $20K for expenses). If your taxable account is generating no income (just cap gains when you sell), that works fine for you, since you'd be paying no cap gains tax in that tax bracket.
An alternative for some would be to tap the taxable account for the $20K in expenses, withdraw the same $23.5K from the IRA (pay the same $3.5K taxes on that), and put the rest ($20K) into a Roth as a conversion.
Comparing the two strategies - either way, you get $20K to spend, and you've reduced your traditional IRA by $23.5. The difference is that the first way left you with $20K in the taxable account (you spent the IRA distribution), the second way let you move $20K into a Roth (you spent money from a taxable account).
Fund an H.S.A: -Between the age of 59.5 and 65 (when you become medicare eligible) distribute a portion of your tax deferred IRA yearly equal to your maximum H.S.A contribution. This will provide a funding source for my H.S.A as well as make these IRA distributions tax free since there tax liability will be offset by the H.S.A contribution (income tax credit) for that same year.
You're get an income reduction for the HSA contribution regardless of what's generating the income. That taxable income could be coming from taxable investments or from IRA distributions, or even from a Roth conversion. What matters is that you've got a fixed size "deduction" (the HSA contribution). So the IRA distribution is tax-free (due to the HSA) only to the extent that you have no other ordinary (taxable) income.
For example, if you contribute $4K to your HSA, and have $1K in taxable income, then only the first $3K of IRA distributions will be tax-free. If you withdraw $4K, then your total taxable income is $5k, and $1k of that is taxable after subtracting off the $4K HSA contribution.
Fund Itemize Medical Expenses: - Between ages (65 -70.5) track medical expenses that are eligible as an itemized tax deduction. Do not use your H.S.A dollars during this time frame to pay for these medical costs. Instead, pay all of these medical expenses with yearly IRA distributions. Using IRA distributions as the funding source for medical related expenses may potentially lowering your taxes on these taxable distributions.
You can use medical expenses as itemized deductions (subject to a floor of 7.5% or 10% of AGI). To do that, you're right, you can't pay them out of an HSA. This works for some people, but only if they've got really high expenses (relative to their AGI), and if they've got enough other itemized deductions to get them above the standardized deduction. At least I think that's what you're writing about here.
Each person's situation is different. This strategy seems to work fine for yours.
Comments
Roth IRAs (as well as H.S.A.) aren’t subject to the required minimum distributions (RMDs) that apply to most retirement accounts starting at age 70½, so you can let any Roth (and H.S.A) assets continue to benefit from potential tax-free growth for the rest of your life. (T Rowe Price quote).
FYI:
-Roth IRAs are inherited tax free.
-H.S.A are taxable when received as a non-spousal inheritance.
-Interestingly, Roth 401K account do have RMDs.
I have a few personal strategy for dealing with RMDs. Consider strategically spending down these taxable IRA dollars first rather than raiding taxable accounts, Roth accounts or Health Savings Accounts, especially between the years of 59.5 and 70.5.
Fund an H.S.A:
-Between the age of 59.5 and 65 (when you become medicare eligible) distribute a portion of your tax deferred IRA yearly equal to your maximum H.S.A contribution. This will provide a funding source for my H.S.A as well as make these IRA distributions tax free since there tax liability will be offset by the H.S.A contribution (income tax credit) for that same year.
Fund Itemize Medical Expenses:
- Between ages (65 -70.5) track medical expenses that are eligible as an itemized tax deduction. Do not use your H.S.A dollars during this time frame to pay for these medical costs. Instead, pay all of these medical expenses with yearly IRA distributions. Using IRA distributions as the funding source for medical related expenses may potentially lowering your taxes on these taxable distributions.
Here's a debatable strategy:
Defer 25% of your IRA well beyond 70.5 by purchasing a QLAC:
why-a-qlac-in-an-ira-is-a-terrible-way-to-defer-the-required-minimum-distribution-rmd-obligation/
https://www.wolterskluwerfs.com/article/iras-and-successor-beneficiaries.aspx
https://www.irahelp.com/slottreport/inheriting-inherited-ira
Say you need $20k/year. You seem to be suggesting that you withdraw approx $23.5K (so that after paying 15% tax, you've got your $20K for expenses). If your taxable account is generating no income (just cap gains when you sell), that works fine for you, since you'd be paying no cap gains tax in that tax bracket.
An alternative for some would be to tap the taxable account for the $20K in expenses, withdraw the same $23.5K from the IRA (pay the same $3.5K taxes on that), and put the rest ($20K) into a Roth as a conversion.
Comparing the two strategies - either way, you get $20K to spend, and you've reduced your traditional IRA by $23.5. The difference is that the first way left you with $20K in the taxable account (you spent the IRA distribution), the second way let you move $20K into a Roth (you spent money from a taxable account). You're get an income reduction for the HSA contribution regardless of what's generating the income. That taxable income could be coming from taxable investments or from IRA distributions, or even from a Roth conversion. What matters is that you've got a fixed size "deduction" (the HSA contribution). So the IRA distribution is tax-free (due to the HSA) only to the extent that you have no other ordinary (taxable) income.
For example, if you contribute $4K to your HSA, and have $1K in taxable income, then only the first $3K of IRA distributions will be tax-free. If you withdraw $4K, then your total taxable income is $5k, and $1k of that is taxable after subtracting off the $4K HSA contribution. You can use medical expenses as itemized deductions (subject to a floor of 7.5% or 10% of AGI). To do that, you're right, you can't pay them out of an HSA. This works for some people, but only if they've got really high expenses (relative to their AGI), and if they've got enough other itemized deductions to get them above the standardized deduction. At least I think that's what you're writing about here.
Each person's situation is different. This strategy seems to work fine for yours.
thanks to ted/bee/maurice/msf and all,for all your articles+comments over the years!