'I don't know how much my wife earns': I'm 63 with $6.4 million in stocks, mostly Apple. Will I get punished on taxes?

MW 'I don't know how much my wife earns': I'm 63 with $6.4 million in stocks, mostly Apple. Will I get punished on taxes?

By Quentin Fottrell

'Each of our properties are worth over $1 million'

"Our primary home has a $300,000, 15-year refinance mortgage with 10 years remaining at 2.5%." (Photo subjects are models.)

Dear Quentin,

I am a longtime reader of your columns. I am interested in vulnerabilities I may not see and any advice you may offer to address my challenges.

I am a 63-year-old former environmental engineer. After a 33-year career in state government, I retired in December 2020 at 58 in the midst of the COVID-19 pandemic. I have the state pension currently, which pays out about $9,000 a month with a 2% COLA compounding annually. I have the state lifetime healthcare insurance (Kaiser Permanente) and it coordinates with Medicare when I turn 65. My wife is included in all this; she will get 100% survivorship and healthcare when I pass away. I pay for vision (VSP) and dental (Delta Dental) insurance through the state as these are not part of the healthcare insurance plan.

My wife, 62, still works at her Kumon Center, helping children get better academically in reading, writing and math. She wants to stop and is planning to sell the center. I don't know how much my wife earns. We have lived in this city since 1989 and have a house that is paid off; our first home is rented out at $3,500 a month. Our primary home has a $300,000, 15-year refinance mortgage with 10 years remaining at 2.5%. This was a lucky pandemic era refinance. Both our properties are worth over $1 million each.

Throughout my 33-year career, we have lived frugally, using coupons and deals and adopting the save mentality of our parents.

Throughout my career, we have lived frugally, using coupons and deals and adopting the save mentality of our parents. I saved diligently into my 401(k) and 457(b) plans, the Savings Plus Program. Our investments started conservatively, but went aggressive through the years. It currently clocks in at $6.4 million - mostly in stocks and a large-cap index fund that follows the S&P 500. About half of that sits in Apple. This growth was mostly through capital appreciation and the splits these stocks went through all that time.

Both my son, 34, and daughter, 27, are well accomplished. Each has a master's degree in the computer-science area and each is employed and living in their own condos that we helped them attain with the down payment. Neither is married yet. We both plan to take up the Social Security benefit at 70. My wife apparently can't do the spousal benefit because her own benefit would be higher than half of mine. My wife has her own IRAs from her work and we do have a joint investment account with Charles Schwab and a checking account.

My dad, 93, is a retired 22-year USN veteran who has land properties in the Philippines which we will have to deal with. I've been trying to figure out what to do with them. My mother passed away a while ago and a couple of properties were inherited. I was able to gain dual citizenship. My income-related monthly adjustment amount (IRMAA) will be high but I think some may be reimbursed by the California Public Employee's Retirement System (CalPER). Medicare premiums, I believe, are reimbursed by CalPERS.

My challenges:

(?1.) My RMDs will be at 75 per the SECURE Act 2.0 and will be very high. As it's all classified as regular income, income taxes will be very high.

(?2.) Long-term care; I wonder if I can address this with self-funding.

Thank you and season's greetings to you and yours.

Hopeful

Related: 'I'm in a financial mess': My income was cut in half. Do I sell my $600K home and kiss my 2.9% mortgage rate goodbye?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

You have children who will also benefit from an inheritance, so this is the equivalent of a double-edged silver sword with - you'll be glad to know - relatively blunt edges.

Dear Hopeful,

Your RMDs are a years-long tax-related obstacle course. There is no one quick fix.

You're a happy, willing, wealthy and hopefully healthy victim of your own success. Taking early withdrawals (59 1/2 without having to pay a 10% early-withdrawal penalty) is a good goal, but it only takes you so far. As you rightly indicate, withdraw early only if it is part of a coordinated Roth-conversion and IRMAA-savvy strategy.

You knocked the ball out of the ballpark in the accumulation stage of your life, and now you are coming - somewhat late (but not too late) - to your distribution phase. You have children who will also benefit from an inheritance, so this is the equivalent of a double-edged silver sword with - you'll be glad to know - relatively blunt edges.

This is not a savings or even a tax problem (you will have to encounter taxes one way or another). Your challenges are twofold: diversification or lack thereof and controlling your withdrawals, hopefully with an aggressive Roth conversion plan that also leaves tax-free withdrawals for your children as part of their inheritance.

Your mission, if you accept it, will be to keep a handle on your marginal tax brackets, the IRMAA cliff you mention that could indeed lead to a sudden, significant jump in your Medicare Part B and D premiums if you cross that threshold, the 3.8% net investment income tax, California state taxes and, finally, survivor tax rates (when one spouse dies).

And now? One of your biggest vulnerabilities has been your greatest strength: riding the tech wave with Apple $(AAPL)$, contributing to a substantial appreciation in your portfolio. You say that "about half" of your $6.4 million is Apple shares. That means you have $3.2 million in a single stock. If this is in tax-deferred accounts, selling triggers ordinary income tax, not capital gains.

Worst-case scenario

With a pension of $108,000 a year, Social Security of $90,000 a year for you and your wife collectively and your rental income, you could - in a worst-case scenario - actually exceed $700,000 in annual income, pushing you into the top federal and California state tax brackets. At 75, you could easily have nearly $9 million in stocks, requiring RMDs of $350,000 a year.

First, how much will you have to take in RMDs? The Internal Revenue Service calculates RMDs by taking the balances of your tax-deferred retirement accounts at the end of the previous year and dividing that by a number based on your life expectancy. At 75, your RMD is calculated using a life expectancy factor of 24.6, meaning you must withdraw 4.07% of your account.

You will likely pay significant income tax on your RMDs assuming you have the lion's share of that $6.4 million in tax-deferred retirement accounts. Your options include performing Roth IRA conversions and making qualified charitable distributions (QCDs) while strategically managing your withdrawals under the guise of an accountant who specializes in RMDs.

With a QCD, people 70 1/2 can send up to around $108,000 (in 2025) from an IRA directly to charity, which counts towards your RMD; QCD limits are subject to annual inflation adjustments. In theory, this would help to lower your taxes and Medicare costs. However, this is not applicable for 401(k)s or 457(b)s; you may wish to consider rolling them into an IRA.

A word of caution from Charles Schwab: "A Roth IRA conversion can be especially advantageous during your initial years of retirement, when RMDs haven't yet kicked in and you're most likely to be in a lower tax bracket as compared to your working years. But if you're already receiving retirement benefits, converted funds could increase your taxable income."

Life insurance and long-term care

Some retirees pair QCDs with Roth conversions in lower-income years, says Savant Wealth Management, which has offices nationwide. "If you don't need the distribution for living expenses, you can invest the after-tax proceeds in a taxable account, contribute to a 529 plan for a grandchild, or incorporate the funds into a broader estate plan," it says.

Given your real-estate and investments, you could comfortably finance your own long-term care if need be. Long-term-care insurance effectively doubles between your 60s and 70s. Most men your age can expect to pay a premium of $313 a month (compared with $536 for someone 75 years old), according to this guide from SmartAsset.

It's more expensive for women due to their longer life expectancy (it costs around $524 for a 65-year-old single woman aged 65 versus $966 for a 75-year-old woman). Medicare does not cover long-term-care insurance. Based on your age, gender and health profile, your monthly premium could be $760 or more, according to a review of health insurers by Policygenius.

If you do decide to fund long-term care? In California, the median annual cost for long-term-care facilities can range from $65,000 for assisted living to over $150,000 for a private room in a nursing home, depending on the facility and location. In-home care could cost you more than $70,000 a year. You have a $1 million rental property to tap into, in addition to your investments.

Moving onto the state of play after you're gone: Roth conversions during your lifetimes will also help prevent your wife from facing a wall of taxes if you predecease her. Another reason to pursue this strategy: When you and your wife pass away, your children will also be forced to drain inherited tax-deferred accounts within a 10-year period.

You have a lot to do, but you have the wherewithal to do it. Include your wife in your plans.

Don't miss: 'I fear a significant decline in the S&P 500': Do I sell my tech stocks before it's too late?

Check out the Moneyist private Facebook group, where members help answer life's thorniest money issues. Post your questions, or weigh in on the latest Moneyist columns.

Previous columns by Quentin Fottrell:

My siblings don't earn nearly as much as me. Should my parents leave me less money in their will?

MW 'I don't know how much my wife earns': I'm 63 with $6.4 million in stocks, mostly Apple. Will I get punished on taxes?

By Quentin Fottrell

'Each of our properties are worth over $1 million'

"Our primary home has a $300,000, 15-year refinance mortgage with 10 years remaining at 2.5%." (Photo subjects are models.)

Dear Quentin,

I am a longtime reader of your columns. I am interested in vulnerabilities I may not see and any advice you may offer to address my challenges.

I am a 63-year-old former environmental engineer. After a 33-year career in state government, I retired in December 2020 at 58 in the midst of the COVID-19 pandemic. I have the state pension currently, which pays out about $9,000 a month with a 2% COLA compounding annually. I have the state lifetime healthcare insurance (Kaiser Permanente) and it coordinates with Medicare when I turn 65. My wife is included in all this; she will get 100% survivorship and healthcare when I pass away. I pay for vision (VSP) and dental (Delta Dental) insurance through the state as these are not part of the healthcare insurance plan.

My wife, 62, still works at her Kumon Center, helping children get better academically in reading, writing and math. She wants to stop and is planning to sell the center. I don't know how much my wife earns. We have lived in this city since 1989 and have a house that is paid off; our first home is rented out at $3,500 a month. Our primary home has a $300,000, 15-year refinance mortgage with 10 years remaining at 2.5%. This was a lucky pandemic era refinance. Both our properties are worth over $1 million each.

Throughout my 33-year career, we have lived frugally, using coupons and deals and adopting the save mentality of our parents.

Throughout my career, we have lived frugally, using coupons and deals and adopting the save mentality of our parents. I saved diligently into my 401(k) and 457(b) plans, the Savings Plus Program. Our investments started conservatively, but went aggressive through the years. It currently clocks in at $6.4 million - mostly in stocks and a large-cap index fund that follows the S&P 500. About half of that sits in Apple. This growth was mostly through capital appreciation and the splits these stocks went through all that time.

Both my son, 34, and daughter, 27, are well accomplished. Each has a master's degree in the computer-science area and each is employed and living in their own condos that we helped them attain with the down payment. Neither is married yet. We both plan to take up the Social Security benefit at 70. My wife apparently can't do the spousal benefit because her own benefit would be higher than half of mine. My wife has her own IRAs from her work and we do have a joint investment account with Charles Schwab and a checking account.

My dad, 93, is a retired 22-year USN veteran who has land properties in the Philippines which we will have to deal with. I've been trying to figure out what to do with them. My mother passed away a while ago and a couple of properties were inherited. I was able to gain dual citizenship. My income-related monthly adjustment amount (IRMAA) will be high but I think some may be reimbursed by the California Public Employee's Retirement System (CalPER). Medicare premiums, I believe, are reimbursed by CalPERS.

My challenges:

(?1.) My RMDs will be at 75 per the SECURE Act 2.0 and will be very high. As it's all classified as regular income, income taxes will be very high.

(?2.) Long-term care; I wonder if I can address this with self-funding.

Thank you and season's greetings to you and yours.

Hopeful

Related: 'I'm in a financial mess': My income was cut in half. Do I sell my $600K home and kiss my 2.9% mortgage rate goodbye?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

You have children who will also benefit from an inheritance, so this is the equivalent of a double-edged silver sword with - you'll be glad to know - relatively blunt edges.

Dear Hopeful,

Your RMDs are a years-long tax-related obstacle course. There is no one quick fix.

You're a happy, willing, wealthy and hopefully healthy victim of your own success. Taking early withdrawals (59 1/2 without having to pay a 10% early-withdrawal penalty) is a good goal, but it only takes you so far. As you rightly indicate, withdraw early only if it is part of a coordinated Roth-conversion and IRMAA-savvy strategy.

You knocked the ball out of the ballpark in the accumulation stage of your life, and now you are coming - somewhat late (but not too late) - to your distribution phase. You have children who will also benefit from an inheritance, so this is the equivalent of a double-edged silver sword with - you'll be glad to know - relatively blunt edges.

This is not a savings or even a tax problem (you will have to encounter taxes one way or another). Your challenges are twofold: diversification or lack thereof and controlling your withdrawals, hopefully with an aggressive Roth conversion plan that also leaves tax-free withdrawals for your children as part of their inheritance.

Your mission, if you accept it, will be to keep a handle on your marginal tax brackets, the IRMAA cliff you mention that could indeed lead to a sudden, significant jump in your Medicare Part B and D premiums if you cross that threshold, the 3.8% net investment income tax, California state taxes and, finally, survivor tax rates (when one spouse dies).

And now? One of your biggest vulnerabilities has been your greatest strength: riding the tech wave with Apple (AAPL), contributing to a substantial appreciation in your portfolio. You say that "about half" of your $6.4 million is Apple shares. That means you have $3.2 million in a single stock. If this is in tax-deferred accounts, selling triggers ordinary income tax, not capital gains.

Worst-case scenario

With a pension of $108,000 a year, Social Security of $90,000 a year for you and your wife collectively and your rental income, you could - in a worst-case scenario - actually exceed $700,000 in annual income, pushing you into the top federal and California state tax brackets. At 75, you could easily have nearly $9 million in stocks, requiring RMDs of $350,000 a year.

First, how much will you have to take in RMDs? The Internal Revenue Service calculates RMDs by taking the balances of your tax-deferred retirement accounts at the end of the previous year and dividing that by a number based on your life expectancy. At 75, your RMD is calculated using a life expectancy factor of 24.6, meaning you must withdraw 4.07% of your account.

You will likely pay significant income tax on your RMDs assuming you have the lion's share of that $6.4 million in tax-deferred retirement accounts. Your options include performing Roth IRA conversions and making qualified charitable distributions (QCDs) while strategically managing your withdrawals under the guise of an accountant who specializes in RMDs.

With a QCD, people 70 1/2 can send up to around $108,000 (in 2025) from an IRA directly to charity, which counts towards your RMD; QCD limits are subject to annual inflation adjustments. In theory, this would help to lower your taxes and Medicare costs. However, this is not applicable for 401(k)s or 457(b)s; you may wish to consider rolling them into an IRA.

A word of caution from Charles Schwab: "A Roth IRA conversion can be especially advantageous during your initial years of retirement, when RMDs haven't yet kicked in and you're most likely to be in a lower tax bracket as compared to your working years. But if you're already receiving retirement benefits, converted funds could increase your taxable income."

Life insurance and long-term care

Some retirees pair QCDs with Roth conversions in lower-income years, says Savant Wealth Management, which has offices nationwide. "If you don't need the distribution for living expenses, you can invest the after-tax proceeds in a taxable account, contribute to a 529 plan for a grandchild, or incorporate the funds into a broader estate plan," it says.

Given your real-estate and investments, you could comfortably finance your own long-term care if need be. Long-term-care insurance effectively doubles between your 60s and 70s. Most men your age can expect to pay a premium of $313 a month (compared with $536 for someone 75 years old), according to this guide from SmartAsset.

It's more expensive for women due to their longer life expectancy (it costs around $524 for a 65-year-old single woman aged 65 versus $966 for a 75-year-old woman). Medicare does not cover long-term-care insurance. Based on your age, gender and health profile, your monthly premium could be $760 or more, according to a review of health insurers by Policygenius.

If you do decide to fund long-term care? In California, the median annual cost for long-term-care facilities can range from $65,000 for assisted living to over $150,000 for a private room in a nursing home, depending on the facility and location. In-home care could cost you more than $70,000 a year. You have a $1 million rental property to tap into, in addition to your investments.

Moving onto the state of play after you're gone: Roth conversions during your lifetimes will also help prevent your wife from facing a wall of taxes if you predecease her. Another reason to pursue this strategy: When you and your wife pass away, your children will also be forced to drain inherited tax-deferred accounts within a 10-year period.

You have a lot to do, but you have the wherewithal to do it. Include your wife in your plans.

Don't miss: 'I fear a significant decline in the S&P 500': Do I sell my tech stocks before it's too late?

Check out the Moneyist private Facebook group, where members help answer life's thorniest money issues. Post your questions, or weigh in on the latest Moneyist columns.

Previous columns by Quentin Fottrell:

My siblings don't earn nearly as much as me. Should my parents leave me less money in their will?

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