Looming Tax Issues?

Summary

Podcast Summary: "Looming Tax Issues?" on Jill on Money with Jill Schlesinger

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Introduction

In the December 23, 2024 episode of "Jill on Money with Jill Schlesinger," host Jill Schlesinger delves into the intricacies of retirement planning, focusing particularly on the tax implications of required minimum distributions (RMDs). The episode features a thoughtful conversation with Donna from Indianapolis, who seeks guidance on managing her retirement funds to minimize tax burdens while supporting her disabled daughter.

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Caller Introduction: Donna’s Financial Landscape [03:20 - 04:21]

Jill welcomes Donna, a retired individual living on a modest pension in Indianapolis. Donna shares her financial situation, highlighting her concerns about when to begin withdrawing from her 401(k) to manage impending RMDs at age 73. She emphasizes her desire to mitigate tax implications and ensure financial stability while supporting her disabled daughter.

Notable Quote:

“I’m concerned about this sort of looming, you know, required minimum distribution that I will face at age 73.” – Donna [04:21]

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Assessing Donna’s Retirement Income and Expenses [04:21 - 07:50]

Donna provides a detailed overview of her income sources and expenses:

• Pension: $2,000/month
• Social Security: Planning to begin in two months, currently at $3,400/month, with potential increases if delayed until age 70.
• Savings and Investments: A 401(k) valued at approximately $813,000, a Roth IRA with $128,000, employer stock worth $54,000, brokerage accounts totaling $217,000, I bonds at $11,000, and checking/savings totaling $58,000.
• Housing: Owns a paid-off home valued at around $310,000, with potential plans to downsize in the future.

Donna expresses confidence in her low cost of living but is cautious about large, unexpected expenses that might require tapping into her savings.

Notable Quote:

“I think this might be the week that everybody is taking off. Or lots of people. Unless maybe you’re working and you’re getting like time and a half. That’s always been a nice thing.” – Jill Schlesinger [01:33]

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Tax Implications and Distribution Strategies [07:50 - 20:30]

Jill and Donna explore various strategies to manage her 401(k) withdrawals and minimize tax liabilities:

1. Early Withdrawals to Mitigate Future RMDs:

   • Jill suggests starting to take distributions before the mandatory age to spread out tax liabilities and potentially reduce future RMD amounts.
   • Discussed the impact of increased taxable income on Jill's tax bracket and IRMAA (Income-Related Monthly Adjustment Amount) for Medicare premiums.

   Notable Quote:

   “An extra thousand to start getting the money out. Seems like a no brainer to me.” – Jill Schlesinger [14:18]

2. Managing IRMAA:

   • Strategies to keep Modified Adjusted Gross Income (MAGI) below key thresholds to avoid significant IRMAA increases.
   • Consideration of taking lump-sum withdrawals during years with lower taxable income to minimize IRMAA surcharges.

3. Special Needs Planning:

   • Jill recommends establishing a Special Needs Trust to ensure Donna’s disabled daughter can receive support without jeopardizing eligibility for federal benefits like Medicaid.
   • Donna acknowledges her sister, an estate attorney, is assisting with her will and trust, though she needs to confirm if it includes special needs provisions.

4. Investment Management:

   • Review of Donna’s brokerage accounts, primarily consisting of index and bond funds with minimal losses, suggesting limited opportunities for tax-loss harvesting.

   Notable Quote:

   “You know, for all intents and purposes, I think it would be highly unlikely that there would be changes that impact anyone over the age of 55, let alone over 65.” – Jill Schlesinger [06:34]

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Special Needs Trust Considerations [10:00 - 11:28]

Jill advises Donna on the importance of a Special Needs Trust to support her disabled daughter without affecting her eligibility for Medicaid. Donna plans to consult her sister, who is an estate attorney, to ensure her trust is appropriately structured.

Notable Quote:

“All this does is it kind of cordons off some money for her, but it does not make her ineligible for any Medicaid benefits.” – Jill Schlesinger [11:13]

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Final Recommendations and Action Plan [16:00 - 20:30]

Jill outlines a practical action plan for Donna:

• Start Taking Distributions Now: Recommend pulling a lump sum (e.g., $50,000) from the 401(k) this year to manage taxable income and reduce future RMDs.
• Monitor Tax Brackets and IRMAA: Advise tracking income to stay within favorable tax brackets and manage IRMAA surcharges.
• Consult Professional Advisors: Encourage working with an accountant to navigate complex tax scenarios and ensure optimal financial planning.

Donna appears receptive to the suggestions, acknowledging the need to balance current tax liabilities with future financial security.

Notable Quote:

“Maybe we don’t have to maximize your Social Security benefit. Maybe we can make a different choice for you.” – Jill Schlesinger [16:24]

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Conclusion and Takeaways

In this episode, Jill Schlesinger provides insightful advice to Donna on managing retirement funds with an emphasis on tax efficiency and supporting a disabled family member. Key takeaways include the importance of early withdrawals to manage tax brackets, the strategic use of trusts for special needs planning, and the necessity of consulting professional advisors to tailor financial strategies to individual circumstances.

Listeners are encouraged to assess their own financial situations, consider the timing of withdrawals, and explore trusts and other mechanisms to ensure both personal financial health and the well-being of dependents.

Notable Quote:

“Change your work. Change your wealth. Change your life.” – Jill Schlesinger [21:53]

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Additional Resources

For more information or personalized advice, listeners are invited to visit jillonmoney.com, subscribe to the free weekly newsletter, or join live webinars offered through a subscription.

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Listener Engagement

Jill concludes by encouraging listeners to engage with the show by leaving ratings and reviews, and to share the podcast to help others navigate their financial journeys.

Notable Quote:

“Lift someone up. Change your work. Change your wealth. Change your life.” – Jill Schlesinger [21:53]

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This episode serves as a valuable resource for retirees and individuals approaching retirement, offering practical strategies to navigate the complexities of retirement income, taxation, and financial planning for family members with special needs.

Transcript

[Fidelity Wealth Management]

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[Jill Schlesinger]

Welcome to the Jill on Money show. It's Monday, December 23rd. I think this might be the week that everybody is taking off. Or lots of people. Unless. Unless maybe you're working and you're getting like time and a half. That's always been a nice thing. If you are that kind of person. Bully for you. Mark and I are taking the week off. We are cooking, we are preparing. We are excited and I hope you are too. If in your travels during this week and maybe next, maybe you're on vacation for a few more days and maybe something creeps into your head like an idea about something you'd like to do. Maybe you're thinking about a financial resolution. Maybe something big is going on in your life. Why don't you get in touch with us? Just go to our website jillonmoney.com click the contact us button. Let us know if you would like to join us on the air live by checking the box. Now while you're on the website, you know that you can sign up for the free weekly newsletter and I love that weekly newsletter. Mark does an incredible job compiling stories that even I miss throughout the week. We look at different things, we have different resources and if you get that newsletter, it'll come to your inbox every single Friday. Also, you just have Eight more days to subscribe to Jill on money live for $35 for the next 12 months after that, the fee is going up. What does $35 get you? It gets you an invitation to participate in quarterly live webinars for the next year and also the back catalog of those that we have conducted already and other bonus content. Okay, so today we are on the line with Donna, who has contacted us from Indianapolis. Donna, hello. Welcome to the program.

[Donna]

Hello, Jill and Mark. It's great to be able to talk to you today.

[Jill Schlesinger]

Oh, we're so happy you're joining us for this big last week. What's your big tradition for Christmas?

[Donna]

Well, we don't open until Christmas Day.

[Jill Schlesinger]

Oh, all right.

[Donna]

Christmas is not my. I hate to sound so scrooge, but do it, babe. Do it for time of years. It's just a lot, but it's. It's a beautiful time, you know?

[Jill Schlesinger]

What's your favorite holiday, Donna?

[Donna]

Probably Thanksgiving, believe it or not.

[Jill Schlesinger]

Because the thing about Thanksgiving, I get why that's everybody's favorite holiday. I find it. It's anxiety provoking for me because then all that food has to come out at once. Whereas at Christmas, I can just, like, basically ply people with food for, I don't know, eight hours, essentially.

[Donna]

Well, I put it on my sister for Thanksgiving, and I just bring sides, so that's.

[Jill Schlesinger]

That's good. You know what I did, I had my sister do it, and I just brought my mother, so I brought aside also. All right, Donna, what's going on? How can help you out?

[Donna]

Okay, well, I'm retired for four years, and I'm trying to determine when I should begin withdrawing from my 401k. I live on a modest pension, and I intend to take Social Security in two months. And just in hearing you folks talk and talking with others, I'm just a. I'm concerned about this sort of looming, you know, required minimum distribution that I will face at age 73. So I'm just. It's my 401k is my biggest retirement asset, and I just want to know if I should begin drawing down on that in order to kind of mitigate any tax concepts.

[Jill Schlesinger]

We love this idea. So, Donna, how old are you?

[Donna]

I'm 67.

[Jill Schlesinger]

Okay, great. And single, married, Partnered?

[Donna]

Divorced. Yeah.

[Jill Schlesinger]

Okay. Kids that are grown.

[Donna]

Grown kids.

[Jill Schlesinger]

Okay. And they're on their own. You don't have to help out.

[Donna]

I do have a disabled daughter that, you know, lives with me, and I will be trying to provide in some way, you know, for her.

[Jill Schlesinger]

Can we just table that for a second. I'm gonna come back to the dis. To. To your daughter in a moment.

[Donna]

Yes.

[Jill Schlesinger]

Because I think that's a whole separate conversation, and it's an interesting one. Okay, so your pension amount that you are. That you're living on right now, how much is that?

[Donna]

2,000.

[Jill Schlesinger]

That's all you only need, 2,000amonth to live on?

[Donna]

Well, I really beefed up my savings, and, you know, I've withdrawn from that as I've needed to. This is a fairly low cost of living area. So, Yeah, I. I've managed that. I don't. Amazing how I have, really.

[Jill Schlesinger]

So your Social Security that you plan to start in two months, how much would that be?

[Donna]

3,400Amonth.

[Jill Schlesinger]

Have you checked what it would be if you waited until age 70?

[Donna]

Yeah, I. It will. It would be in the fours. I'm just very concerned about the political climate. And I know you kind of poo poo that, but it's not that I.

[Jill Schlesinger]

Poo poo it in general, but I think that if you're. I mean, for all intents and purposes, I think it would be highly unlikely that there would be changes that impact anyone over the age of 55, let alone over 65. But I hear that, and maybe it doesn't really matter anyway. Okay, so I get where I get what you're saying. So if you look at how much you really spend, you said 2,000amonth for the pension, but you're pulling some money on an ongoing basis or just for big stuff from your savings?

[Donna]

It seems like I float along. And then I went to Hawaii in November, so I kind of moved some money around. And. Yeah, it's really kind of. If a big ticket item happens, a.

[Jill Schlesinger]

Car, a big trip or whatever.

[Donna]

Yes.

[Jill Schlesinger]

Okay, how much do you think that is on, like, if we had to extrapolate that over the course of a year. 10 grand a year?

[Donna]

Yeah, I think I. I spend about 3 to 3, 500. I. I was just kind of doing back of the envelope math and looking at my bank account. I'm like, okay, I really spend that much. But it kind of.

[Jill Schlesinger]

You're. I love that you think 3,500amonth is that much. So. Congratulations. Well done. All right, let's Talk about this 401k that has not yet been taxed. How much money is in there, Donna?

[Donna]

I think. Where did I have my notes? I think it's 8. 8 13. 813,000. 8. 44.

[Jill Schlesinger]

I don't need the extra dollars. All you guys make me work so hard, I'm putting 813,000. Okay, then you also. Do you also have an IRA? A Roth IRA? Anything else? That's retirement. Yeah, tell me about that.

[Donna]

I have a roth. It's at 128,000, employer stock at 54,000.

[Jill Schlesinger]

Any restriction on that? Employer stock? I mean, it sounds like you're retired, so you can take that when you want.

[Donna]

You know, I'm very unsure of that. You know, I don't know if it's already vested. I really kind of have to look into that.

[Jill Schlesinger]

Usually. I will tell you, usually when you leave that your stock vests.

[Donna]

Okay.

[Jill Schlesinger]

Okay. And is that in that stock? I presume, has that been granted to you? In other words, has it been taxed yet? Do we know?

[Donna]

I don't know. I guess.

[Jill Schlesinger]

Okay, so we're going to get. We need info. I'm going to just make a note. Need info. Okay, so the employer stock. Need info. And it's a publicly traded company, right?

[Donna]

Yes. Correct.

[Jill Schlesinger]

Okay, got it. Next. Okay, so we got brokerage. What do we got there?

[Donna]

217,000.

[Jill Schlesinger]

217,000. Okay. What else?

[Donna]

An I bond at 11,000. Checking and savings at 58,000.

[Fidelity Wealth Management]

Great.

[Jill Schlesinger]

And do you own a home?

[Donna]

I do. It's. It's paid for.

[Jill Schlesinger]

What's it worth?

[Donna]

Probably 310. I would. Yes.

[Jill Schlesinger]

Okay. Planning to stay there, or is there any potential.

[Donna]

Yes, I. I might downsize. Just because, you know, at some point, I don't think I'll even need three bedrooms, but I'm here for indefinitely.

[Jill Schlesinger]

Okay. So now I just want to circle back to. There's no other assets, right? There's no rental property or anything, you know, floating around? Okay.

[Donna]

No.

[Jill Schlesinger]

So here's my question to you. Your daughter, you say she is disabled. Is she entitled to federal benefits? Is she an adult who gets federal benefits?

[Donna]

So she, you know, she can drive, she works. It's not a living wage, really, but every time she's applied for Social Security, she's been denied because I think she has a pretty decent work history. But she.

[Jill Schlesinger]

How dare she.

[Donna]

Yeah, she does get Medicaid, so.

[Jill Schlesinger]

Okay, so she qualifies for Medicaid.

[Donna]

Correct.

[Jill Schlesinger]

Have you done any planning around her with a special needs trust, or is that something you have not done yet?

[Donna]

My sister is a. Is a estate attorney, so.

[Jill Schlesinger]

Oh, good.

[Donna]

Yeah. She's helped me put together, you know, my will and trust. I don't know if it's characterized as special needs. I mean, everything is in trust. My son is the heir. But we would have to sort of in the background. Deal with her.

[Jill Schlesinger]

I guess I'd say, well, do me a favor. Just, you know, for fun, ask your sister, have we created a special needs trust for the daughter.

[Donna]

Right.

[Jill Schlesinger]

And all this does is it. It kind of cordons off some money for her, but it does not make her ineligible for any Medicaid benefits.

[Donna]

Okay.

[Jill Schlesinger]

So it may be that that doesn't. It's not necessary if you leave everything to your son and let him divvy it up. I. But, you know, it's worth asking the question. That is something that is kind of a. An interesting possibility.

[Donna]

Okay.

[Jill Schlesinger]

But again, we'll just ask that question. Okay, so now we are back to your question.

[Donna]

Yes.

[Jill Schlesinger]

So we have eight years before you have to take money out. So you're worried that this is going to grow because you're not tapping any of your 401k right now. Right?

[Donna]

Right.

[Jill Schlesinger]

So you're like, okay, it's going to grow to a million dollars or more, and then they're going to force me to take it out. So have you thought about pulling money out in the near term and maybe even delaying Social Security while you pull some of the money out? Have you thought about that?

[Donna]

I mean, I. I guess I'm looking to you for just some insight about what the best route might be, because.

[Jill Schlesinger]

I know what you're going to tell me. I just can tell. You're a very frugal human being.

[Donna]

Yeah.

[Jill Schlesinger]

So I have this distinct belief that you're going to tell me that you don't want to pay for more for your Medicare if you start doing this.

[Donna]

Oh, yeah, correct. That bothers me. I mean, here, my. My position is that people pay whatever needs to be paid. But I'm trying to just see how could I spread this out?

[Jill Schlesinger]

I mean, I mean, you. So right now, wait a second.

[Donna]

You're.

[Jill Schlesinger]

Wait, but wait a second. You are. Let's just think about this. So right now you have 25 grand a year in taxable pension income, Right?

[Donna]

Right.

[Jill Schlesinger]

You've got some money that is generated from the brokerage account, right?

[Donna]

Yes.

[Jill Schlesinger]

So, but if I looked at your tax return, bottom right hand corner, do you have any idea what the number is?

[Donna]

Yeah, like, yes, last year I had adjusted gross income of 32,700 and then taxable income of 17,000.

[Jill Schlesinger]

Okay.

[Donna]

So 12% tax bracket.

[Jill Schlesinger]

So obviously, if we wanted to start pulling money out of the account, some money out, and we pop you up to the 22%, I mean, you're going to go to 22% as soon as you Get Social Security anyway. Right. So that's number one. So then let's think about this. That for IRMAA. So gang, remember income related monthly adjustment amount IRMAA. If you are single and you make less than $103,000, that's like your magic. That's your first tier of IRMAA, meaning that that's where you pay what you're paying now, which is I think about 175 bucks a month. Right?

[Donna]

Right. Yes.

[Jill Schlesinger]

So the next level is, if we go up to this is like 129,000. Okay. And that means you would pay an extra $83 a month. It's an extra thousand dollars a year. That seems to be like a no brainer. An extra thousand to start getting the money out. Seems like a no brainer to me.

[Donna]

Yeah.

[Jill Schlesinger]

But if you want to be really conservative and you say I hate irmaa, I refuse to do it, Jill. Okay, if we said you're going to take out $50,000 a year from your 401k, just going to take it as a distribution. If you do that, I think we stay just underneath the IRMAA surcharge limit. Now, you have to be very careful because it's a cliff. So if you go over by $1, you're screwed.

[Donna]

Right.

[Jill Schlesinger]

Okay. But if we did that. Okay, well that's fine. We could take 50 grand out and you could do it probably this year because you actually have a year to do this. You know, like you could do, I don't know what your taxable income looks like for this year, but you could do it for your age, 67, 68, 70. So you could do it definitely for four years and then you could take that money out and then you can start collecting Social Security and you can kind of see how it goes. The issue, Donna, is that we don't know where tax rates are going. I don't think that it's necessarily going to be the worst thing in the world. But I'll tell you what, if you got a million and a half bucks and all of a sudden you're forced to take required minimum distributions, let me tell you, you are going to pay irmaa, there's no doubt about it. So the question is, do I pay a little bit of IRMAA right now? Start to get some of the money out, stay under, say, 129,000. Right. Again, this is, please be very careful about this because of the cliff that occurs. So if that's the case, then you take, take out 50 if you decide you're willing to pay the $83 a month, which I don't think is that bad, but.

[Donna]

Okay. Right.

[Jill Schlesinger]

If you decide that you can go up to $129,000, let's call it 125, so you don't drive yourself crazy, and, and you can take the money out, make sure your adjusted gross income stays below that 129 and it's all good. And then you're pulling money out every year. At age 70 you be, and by the way, you can use some of this money to live on. Right?

[Donna]

Right.

[Jill Schlesinger]

And you don't have to worry about saving your, you know, you're using your checking savings. You just live on some of this money and it's all good. And then at age 70, you're going to start collecting Social Security. Now, the real question will be once.

[Donna]

You'Re really, you're really trying to talk me into delaying it, huh?

[Jill Schlesinger]

Well, I think if you don't want to delay it, but want to run it, let me just say, if you want to claim right now, what you're going to have to decide is whether you're willing to pay a higher IRMAA amount right now to get money out of your 401k. Because obviously if you claim right now, all of a sudden you're, you're like, you have, let's see, so you have, right now you have like 50 and then you're going to have another, what did you say, 3,400amonth. 3,400, yeah. So, you know, you're going to be pretty close to paying IRMAA anyway at 83 bucks a month. Will you be, would you be willing to pay an extra $200 a month to go, you know, pull out up to, let's see, for single, this is 2024. So this will come out, but it's modified adjusted gross income. So do you work with an accountant?

[Donna]

I do not.

[Jill Schlesinger]

This may be one year. You want to like, at least start or you want to play with these numbers if you're doing it yourself. But your modified adjusted gross income could go up to 160 grand. Okay. So you could say, okay, I'm going to claim I'm going to get my normal income, my 32,7. I'm going to add back in my taxable, you know, distributions from the brokerage account. I'm now going to have my Social Security. And let's say that that together is 80ish for you. Okay. Then you have to make a decision. Well, okay, I want to pull out. Let's say 70 grand from the 401k, pull it out. Now, I'm in the IRMAA category where I'm paying 208 bucks a month. And I'll live with it because I want that money out of the retirement plan so that I'm mitigating future IRMAA payments.

[Donna]

Okay. Okay.

[Jill Schlesinger]

Does that make sense?

[Donna]

I think so, yeah.

[Jill Schlesinger]

All right. Now, the question that I have for you is in doing this, tell me a little bit about what's inside of the brokerage account, because I'm kind of intrigued by the tax, whether there's some. Because maybe we can mitigate some of the taxable income from there. What do you own in there?

[Donna]

Actually, it's across three different accounts. One I have at Vanguard, and that's pretty much, I don't know, 70% total index fund, and then, you know, 30%. I like a bond fund kind of that way with all three. Okay, so, and there's not very, there's.

[Jill Schlesinger]

No, there's no losses. There's nothing on there. Right?

[Donna]

I don't, I don't think so.

[Jill Schlesinger]

The only other thing that I would do is that if you plan to take the distribution from your 401k, you know, you could do it one of two ways. You can do it monthly. I would do a lump sum. I would just get the money out of there.

[Donna]

So 50k?

[Jill Schlesinger]

Yes.

[Donna]

Okay. Starting this year, even I would.

[Jill Schlesinger]

Your income is low this year.

[Donna]

Right, right, right, right. Yeah.

[Jill Schlesinger]

So we know that you're, you know, in fact, this year, if you're going to claim Social Security next year and your, your income is only, you know, 50 this year, I might take out more this year I might take out, you know, at least 50, but maybe we have to see what the. It's hard to know with your income, but, yeah, 50 at least.

[Donna]

And Jill, what funds would I start taking that from? I, I, I'm not really clear about that.

[Jill Schlesinger]

Like, so you have a 401k or is it already an IRA rollover?

[Donna]

How have you managed it, the 401k?

[Jill Schlesinger]

And what do you have in there right now? What funds?

[Donna]

What, like a target date? 20, 30 of 40% stable. It's called stable value. 4% fixed income, 4% US stocks, 26%.

[Jill Schlesinger]

Just take it out of the target date. I would take the first chunk out of the target date every year. You'll just take some money out. Mark, do you think that Donna has decided to delay for her Social Security until age 70? What is the answer?

[Donna]

I'm taking the under.

[Jill Schlesinger]

I think I'm taking the under also. But that's okay. Nothing will change in her life. But go talk to your sister, ask her about the special needs trust and claim your Social Security and start pulling some of the money out of that retirement account. And don't be afraid. You pay a few taxes, it'll be fine. So if you are like Donna and you're worried about the Social Security system, oh my gosh, so many people are. I don't necessarily think it is going to be as big an issue as perhaps many others do, but I could be wrong. So if you're worried about that, maybe we don't have to maximize your Social Security benefit. Maybe we can make a different choice for you. Get in touch with us go to jillonmoney.com click the contact us button. Do let us know if you'd like to come on the air live with us. And remember, you can subscribe to us on the Odyssey app or wherever you find your favorite podcast. Please leave us a rating and review wherever you listen. Lift someone up. Change your work. Change your wealth. Change your life. Thank you for listening and we'll talk to you tomorrow.

[Sharon McMahon]

Hey friends, I'm Sharon McMahon, host of here's Where It Gets Interesting. Each week I speak with authors, experts and thought leaders on everything from American history and democracy to how to be a better person on the Internet. And don't miss my extremely popular Docu series which educate you on things you never learned in history class. Follow and listen to here's Where It Gets Interesting on the free Odyssey app or wherever you get your podcasts.