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I am recently retired at age 62 and will be receiving my…

I am recently retired...

I am recently retired at age 62 and will be receiving my first Social Security Disability check in April of 2018. I have a 401k that I need to do something with and consider the tax liability. What would you advise I do as a single disabled person ?

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

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Answered in 7 minutes by:
3/9/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,132
Experience: Taxes, Immigration, Labor Relations
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You are correct - that distributions from 401k plan should be planned carefully to avoid being pushed into higher tax brackets.

Several issues to consider

-- you are NOT required to take distribution until the year you will turn 70 1/2 - if the plan performs well - and you do not need the money to cover your living or other expenses - you may keep your funds invested for some time.

-- these are YOUR money - and you may take distributions as you wish - but based on your other income - you may want to estimate possible tax liability before taking distributions.

-- if your plan doesn't perform well - you may consider different investment option - to move all or part of funds into IRA account where you will manage investments on your own OR will will place the money under professional supervision.

Let me know your intention and I will help with estimations.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,132
Experience: Taxes, Immigration, Labor Relations
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Customer reply replied 4 months ago
I was thinking of rolling over the 401K into an IRA...but regular IRA or Roth ? I am thinking of remaining with Vanguard who has managed my 401K these many years. I very well may have to draw on some of these 401k funds as my Social Security Disability check will only be $2399.00 per month. This amount does not cover all my expenses as my medicines are expensive and the insurance I am paying nearly 400.00 per month for health insurance that does not cover medicines. I have a 503.00 car note, lease on house is 900.00 month, car insurance, utilities, phone, tv, internet. It all adds up. Then there is the tax situation to consider. What would you do ?
Customer reply replied 4 months ago
I am waiting on your call
Phone call session started

So far - your 2018 social security benefits are
$2399 * 9 months = $21591
- so far if that is your ONLY income
- and you take $12000 in taxable distribution
-- your tax liability will be ZERO
----
if you increase your distribution till $20,000
- your federal tax liability in 2018 is estimated as ~$1100
if you choose to take larger distribution $30,000
- your federal tax liability in 2018 is estimated as ~$3200
if you choose to take larger distribution $40,000
- your federal tax liability in 2018 is estimated as ~$6100
if you choose to take larger distribution $50,000
- your federal tax liability in 2018 is estimated as ~$8300

Please be aware that your taxable distribution includes BOTH - the money you take out for your own use and amounts you choose to convert tto Roth IRA.

if you choose to take FULL distribution $120,000
- your federal tax liability in 2018 is estimated as ~$24600
.
Based on the above - the BEST strategy would be to have $6000 for personal living expenses and $6000 for Roth IRA convertion on the annual basis - and you will NOT have any income tax liability.
You may transfer all funds into traditional IRA as you wish - and have a separate Roth IRA account under teh same administrtaion - to manage your annual convertions.
If for some reason you want faster conversions or larger distributions for personal living expenses - you will expect some tax liability - mainly at 12% federal tax level.
However - your social security benefits will become partly taxable - so your effective rate might be slightly larger.

Please elaborate if needed.

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