Community Champion ⭐⭐⭐

The Boomer Tsunami

Forum|Forum|1 year ago
October 12, 2024
7 replies
2578 views

Did you know that we are now in the midst of the BIGGEST number of people turning 65 in a single year in U.S. history. And it will continue this way until about 2030 when the last of the Boomer Generation reaches their full retirement age.(FRA)

So we are gonna have additional strain being put on Medicare and Social Security administrations in the next several years - More than 11,000 seniors a day will be signing up for Medicare and then Social Security -

For Retirement, some may be prepared, others maybe partially - others not so much. Many of them will continue to work - full time or part time - well past their FRA.

ARE YOU READY?

IF ALREADY THERE - would there be anything you would have changed in your plan for retirement?

For me, since I am well past this age now, I would have not thought so much about saving tax money by contributing to a tax-deferred plan like a Traditional IRA or 401K during my working years - I would have instead invested more (or all) into my ROTH IRA, paid the taxes then and reap the benefits now of tax free (on principal and earnings) distributions.

I guess that taxes are things that we cannot ever forecast with certainty -

OH, Well -

Good Luck with your plan -

This topic has been closed for replies.

fffred

Conversationalist ⭐⭐⭐

@GailL1 You bring up good points about the relative balance between taxable accounts and tax-deferred accounts (IRA, etc) and tax-free accounts (Roth IRA, etc). As you indicated, it's difficult to forecast (for planning purposes) how tax rates and rules may change in the future. Many years ago I read some comments in the financial press to the effect that, at least for some people, it was best to try to defer taxes to the future and do that for as long as possible. I'm not certain that this was directly commenting on IRA type accounts but that's how I applied it (possibly naively).

But even now you are likely eligible to perform Roth conversions from your regular IRAs. Of course, you'll likely pay income tax on the converted amount and the greater income for the year may affect income-based issues with Social Security and Medicare. But it is possible that this might come out better for you over time (and I know some people do this with their heirs in mind).

Some software programs that perform financial planning can take these conversions into account. You really have to look at the effect on your entire income and costs to see if the conversion is beneficial. In the past I studied my scenarios with an awesome free web-based software that unfortunately is now defunct. This was the "i-ORP", referring to Optimizing Retirement Planner by James Welch. Unfortunately, James had health issues and may be defunct now as well. It was easily the equal of paid commercial software that I investigated. The program output gave each retirement year's income and spending/expenses, optimizing all accounts in order to maximize the cash available for spending over the user's expected lifetime. One of the inputs was if you wanted to perform Roth conversions. I was surprised to see that the software had me making Roth conversions far into the future beyond my retirement date. With my background in mathematical analysis and software quality control I spent many hours investigating the program and came away highly impressed, as well as wiser about my own situation.

Like you, I wish I had more balance between my regular IRA and my Roth IRA. Conversions weren't in the cards the last few years of my career but I did do a couple after I retired. Now that I have moved to Canada the conversion game is over for me due to how Canada t treats US-based Roth IRAs; this makes my planning simpler.

But if someone asked me if these conversions were worthwhile I would say "possibly yes". Unfortunately, it takes a sharp pencil to crunch the numbers on this to determine just how much benefit there may be. Of course, if tax rates go crazy in a few years that may change the odds.

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Tonster521

Community Champion ⭐

@fffred Thanks for your positive replies on some of my other replies/posts. I agree that one needs a sharp pencil (with an eraser) as well as a crystal ball to forecast tax brackets in order to analyze the Roth versus Traditional approaches. The solution may be Roth in one's lower earning years and Traditional when one's earnings are greater. Of course, one should never miss out a Company match on a 401 K.

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Tonster521

Community Champion ⭐

@GailL1 I understand your revised approach (Roth). As you know, every person has to evaluate their own factors such as tax brackets, time invested, and rates of return in order to determine if a Roth would be a better approach . However, if one's tax bracket before retirement is greater (i.e., 22%) than after retirement (i.e., 12%), the Roth may not be the better choice even though qualified Roth distributions are tax free. You need to account for the amount of taxes paid on the contributions as well as the opportunity loss on those amounts. For example, if the amount of taxes paid was a hypothetical $1,000 in a given year, at 5% that $1,000 after 30 years has a future value of $4,321.94 rounding to $4,322. The next year would be $1,000 at 5% for 29 years and so on. Accumulating all 30 calculations would accumulate to $66,438. This is the amount that would be in one's Traditional IRA. However, if one choose the Roth, that is the cost for the Roth. Can one recoop that cost over time if comparing the two approaches on a level playing field? The answer is yes if one's tax bracket is greater after retirement. However, if one's tax bracket is the same or lower after retirement, it will be difficult to recoup. There are a number of things to evaluate.

GailL1Author

Community Champion ⭐⭐⭐

@Tonster521

Of course, I am speaking for myself - There are other considerations for ROTH contributions rather than Traditional IRA which I was unaware of in my younger (self-employed) days.

AND that is, when one turns 65, the reporting of income for the Medicare IRMAA surcharges every year. The Traditional IRA distribution counts as income for these IRMAA surcharges - the ROTH distribution does not since it isn’t reported on the tax form.

I certainly did not know about these IRMAA surcharges when I was 30-40-50 and was maxing out the Trad. IRA contribution amount, especially in those lucrative years when my self-employment income was high and taxes were a main concern.

I started thinking about this when I became a widow at 58 and knew that I needed to make plans for the long haul. My self-employment income was tied directly to the creative talents of my husband - so when he died, much of my income from this self-employment just died with him. I did manage to fill in some via selling copyrights.

So at 59 I started the conversion of Trad. IRA to ROTH and did as much as I could between 59 and 62 - If I had continued on, I would have had even more years of paying the IRMAA based on the tax return years used to compute it.

But looking back now to those early years of contribution - I think it would have come out much better for my taxes NOW and IRMAA surcharges to have just gone pretty much all ROTH.

Just goes to show that one has to keep up - one not only needs current knowledge of taxes and how other government programs work - they have to look far down the road to other consequences.

I guess I should have had a better financial advisor at that time - if they even knew about it - but for so long, being self-employed, I had just always just did it on my own - I just didn’t realize it at the time.

Maybe I should just keep my mouth shut here, in case some [government head] personnel is lurking and decides to change the rules for the betterment of Medicare Part B. Yea, I think they could change the rules as to how ROTH distributions are counted for Medicare IRMAA calculations.

I try to keep my Trad IRA distributions at the minimum according to the life spread table. But as one ages, and slows down in most every way, NOT SO, for this Trad. IRA distribution life table - it speeds up the % that must be distributed.

The QCD might be an option.

Oh, well, I did what I could then and am doing what I can now. Yes, the investment have performed well thru the years in both retirement accounts - who would have thought this well.

I just remember that being self-employed we decided early on that since there was no “employer” match or “employer” subsidy - we had to do it on our own - so priorities for our health insurance and our retirement were placed high up.

I just wish the better half was still around to help me let go and not worry about this so much - we balanced each other out like that -

Thank you and @fffred for your responses.

IT‘S ALWAYS SOMETHING . . . . .. . . . Roseanne Roseannadanna

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Tonster521

Community Champion ⭐

@GailL1 Thanks for your reply. You have done an outstanding job with your retirement and investment strategies. I would not let the IRMAA surcharges bother you. As you know, the IRMAA scheme is simply a reduction in the 75% Medicare Part B subsidy that we receive from the federal government (i.e., taxpayers). If your income exceeds certain thresholds, the IRMAA requires to contribute more by assessing the surcharge. Medicare Part D has a similar scheme.

I am sorry for your loss. I am sure you were a great couple.

A

AnthonyA191922

Contributor ⭐

Gail,

My NRA is May 2025 & I just signed up here in Jan 2025 for months early. Am I automatically signed up for Medicare also by doing this?

I returned to the SSA website to sign up but there is no link there to sign up.

Thanks,

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