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21

Early Retirement / Re: Salary Deferral Distribution

« Last post by SamChav on December 31, 2022, 07:36:50 AM »

Happy New Year!

Thanks for your response. I agree.
Between 5 yrs(22% marginal TB)  and 10 yrs (24% marginal TB) distribution options which one would be better? It's financially stable company, pays out a min of 6% and averaged 7% in the last 20 years.  So which is better, take 5 years distrib. and invest in index funds or 10 years with a min 6% rate of return...in the wake of the current economic and stock market down turn?

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Early Retirement / Re: Salary Deferral Distribution

« Last post by gocurrycracker on December 25, 2022, 11:02:58 PM »

Generally speaking.... tax deferral over 10 years +/- isn't worth a ton and it is hard to get excited about saving 2% on taxes. (400k * 2% = $8k.)

I could ask some followup questions if you disagree.

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Early Retirement / Salary Deferral Distribution

« Last post by SamChav on December 23, 2022, 03:34:28 PM »

I quit my job back in Apr, 2022 to Coast FIRE in 8 years. 

Now on a Freelance contract till Jun, 2023 and expected to make 80K in 2023.

My salary deferral plan (457) from ex employer begins distribution in Feb, 2023.  I have an option to spread it across 5, 10, 15 years.
Current balance is 400k and interest is accrued during the distribution phase averaging between 6-7% per year.
 
For 2023, if we spread the 457 distribution across 10 or 15 years we remain in 22% Marginal bracket, if 5 years it will be 24%. Not sure after 2023, depends on my gig income. We can meet our expenses with my spouse's reatively stable income + any of 5, 10 year (not 15 yr) distribution.

Question: Not able to decide to go with 5,10 or 15 years distribution? Any thoughts very much appreciated.

Thanks for your help!
Sam

24

Taxes / Re: Distributing an Inherited IRA as an early retiree

« Last post by gocurrycracker on November 07, 2022, 11:28:47 AM »

Let's look at the 2 extremes

If you take it all out today you pay about $60k in ACA premiums and income taxes, so you will have about $190k remaining to invest in accordance with your target asset allocation.

If you wait 10 years and do a large withdrawal at the end, assuming 7% annual return you will make a $500k withdrawal with marginal rates up to 35%+/- (total tax ~= $113k.)


At the same time, that 190k may have grown to $380k or so (same 2x.) 


Total value is roughly the same in both cases - in the former the $60k in taxes not paid gets to grow longer but then you pay taxes at a higher rate on withdrawal.
In the latter case you have a bunch of unrealized capital gains which may never be taxed, and you will have taxable income from dividends / interest along the way. As you say, more income means higher % FPL which may impact CSR. Independent of this choice, dividends can go up and down and many companies have been increasing dividends faster than inflation for some time.


FPL numbers do go up with inflation, but with a delay of 1 year... ACA enrollment for 2023 is based on FPL numbers reported in January 2022

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Taxes / Re: Distributing an Inherited IRA as an early retiree

« Last post by theupperwestmike on November 03, 2022, 04:05:27 PM »

Hi Jeremy,

One new factor that just came to mind that I didn't think of earlier (maybe you did, but I missed your mention of it):

If we take all $250k from the inherited IRA into our taxable account year 1, and invest it in vanguard funds paying about 2% in dividends, we'll have another $5,000 in income each year. So it's not like I can just go back to my usual income and ACA/tax planning as it was before in my years 2-10. We'll have a taxable income of ~$50,000 a year instead of ~$45,000 a year. Luckily we have some earned income, so if we want to shoot for those sweet CSRs, we can contribute to an IRA each year to get ourselves down near that 250% FPL number**. But any Roth conversions and capital gains harvesting would become near impossible.

This CSR part doesn't apply to everyone, we just happen to be at that threshold, but paying a little more in ACA tax years 2-10 would be universal by taking the $250k in year 1. Perhaps taking it in year 10 makes more sense? Then again, it's probably just a fraction of a percent difference in overall tax rates.

Am I thinking about this right?

** Since the FPL numbers are derived from the CPI, with current inflation levels, maybe the FPL levels will increase a good chunk over the next couple years and soon a $50k income for a family of 2 will be eligible for CSRs.

26

Taxes / Re: Distributing an Inherited IRA as an early retiree

« Last post by theupperwestmike on October 29, 2022, 01:04:09 PM »

Ah yes, you're right, I was just thinking of a big "taxed owed" number come April and was assuming there'd be a commensurate penalty. I didn't think it through. We will have had more taxes withheld from our "fun jobs" than the tax we owed last year (that's line 24 on form 1040, right? If so, that's $155 for us.)

In researching Illinois underpayment penalty rules, I was reminded that Illinois is generous to retirees in that they don't tax withdrawals from retirement accounts, so no worries there!

As for your spreadsheet, yes, your numbers make sense. With withdrawing the funds this year, the repayment of PTCs would also be a factor (for those scenarios over 400% FPL, we have to pay it all back, but paybacks are limited at lower FPLs), but wouldn't be big enough factor to change my mind.

I'll keep thinking about "other factors" but unless I come up with them, I think I'll pull the trigger on a 2022 full distribution. Thanks for helping us flush out the scenarios! It was a surprising result for me! I would have guessed that a scenario like withdrawing up until the 400% FPL or 12% tax bracket each year would have come out on top.

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Taxes / Re: Distributing an Inherited IRA as an early retiree

« Last post by gocurrycracker on October 29, 2022, 11:33:31 AM »

What is the underpayment penalty you are referring to? For underpayment of estimated tax?

I don't know IL's rules, but for federal it is easy - the tax is due as you go... if you realize a large chunk of income on December 31st, that is due with the estimated tax payment on Jan 15. No need to pay in January '22 because you think you will have a big income jump in December '22.

But even that may be unnecessary and you can just pay in April as long as you make estimated payments equal to or greater than 100% of the tax you owed last year... which is what, $0?
https://www.gocurrycracker.com/avoiding-tax-penalties/


You shouldn't have to pay back any CSRs but you will have to repay the PTCs in full when you go over 400% FPL (edit: 600% FPL)


Do you concur with the #s in the spreadsheet?

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Taxes / Re: Distributing an Inherited IRA as an early retiree

« Last post by theupperwestmike on October 29, 2022, 11:12:09 AM »

Sorry for the delay, life got in the way with me being able to put my focus on this the past few weeks.

Gosh, it sure seems like taking the lump sum in a single year is the way to go.

- it wins for simplicity and not having to remember to recalculate things every year
- it's net tax rate meets my judgement of "close enough!" to the other options
- we have the free cash to pay the tax due
- in a down market, it's not a bad time to take a distribution from an IRA

If we did it during the 2022 tax year, wouldn't we owe an underpayment penalty of 3% Federal and "up to 10%" state (Illinois)? So we would have to do it for the 2023 tax year and pay estimated taxes along the way next year? (Or likely Vanguard can withhold taxes for us).

It would have been nice to do it during the 2022 tax year because we *are* eligible and have been enjoying CSRs, and we wouldn't have to pay them back come tax time (in my understanding). But I can't think of away around the harsh underpayment penalties.

I also have a nagging feeling there's another factor or two we should be considering in our decision, but I haven't come up with it yet. I'll keep thinking.

(As I typed that I thought that while we rent, we might want to buy a home, and with mortgage rates around 7%, maybe having a nice pile of cash laying around to put toward - or pay for a home outright - might be a blessing. Another in the "pro" column for taking a big distribution up front.)

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Travel hacking / Re: Credit card points (maximize)

« Last post by gocurrycracker on October 24, 2022, 12:07:47 PM »

My pleasure.

If you have any questions as you work through a redemption, just ask.

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Travel hacking / Re: Credit card points (maximize)

« Last post by Patrick on October 22, 2022, 09:23:31 PM »

Thank you for the advice/info Jeremy!