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Any one seen this thread at Bogleheads?
Old 04-20-2011, 12:05 PM   #1
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Any one seen this thread at Bogleheads?

Rick Ferri's comments on RMDs is starting to scare me since most of the retirement $s are in IRAs:

Bogleheads :: View topic - What the Rich are Doing

Its also interesting to see again, how most of us never see ourselves as rich.
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Old 04-20-2011, 12:12 PM   #2
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What are you worried about ? Is it having to pay taxes or is it the forced distribution ?

Keep in mind that taking RMDs and paying income taxes is required after 70.5 years of age, spending the amount left over after taxes is not.
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Old 04-20-2011, 12:32 PM   #3
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Its the possibility of paying much higher taxes on the forced distributions late in retirement and that eatting up my nest egg before I kick the bucket. Take a look at some of Rick's comments. Maybe purchasing an annunity could make sense.
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Old 04-20-2011, 12:40 PM   #4
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Death and Taxes are hard to avoid.

And it's true, if and when tax rates go up then you'll pay more. And the trend is for higher taxes.

There are some tax minimization games people use to pull money out of taxable IRAs before RMDs are required and convert to ROTH accounts.

If you haven't already done so, check out the (tax-optimal) ORP calculator. They do a pretty good job of tax minimization.

Optimal Retirement Calculator and Retirement Decision Support System

But you will still have to pay taxes on whatever you pull out of a taxable IRA.
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Old 04-20-2011, 12:47 PM   #5
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Originally Posted by DFW_M5 View Post
Its the possibility of paying much higher taxes on the forced distributions late in retirement and that eatting up my nest egg before I kick the bucket. Take a look at some of Rick's comments. Maybe purchasing an annunity could make sense.
Haven't even read it yet but if you buy an annuity with qualified funds you pay taxes on the annuity payments - a lifetime annuity is considered to be RMDs on the pricipal invested.

Edit: I see they are talking about taxes on wealth. Nobody is going to impose such a tax on the net assets of IRAs and 401Ks - those are already setup for taxing. The only candidate I have heard propose a tax on wealth was Trump. In 2000 he suggested that a one time 14% surtax on net worth for the rich would solve all of our fiscal problems. Go Tea Party.

Edit:edit: I should wait before responding. I see they got back to escalating RMDs kicking you into higher brackets. I'm not worried about it. Ours were taken at the top bracket anyway and no one seems inclined to kick us back to those brackets anyway, nit that I would object if they did. But I can see that it could be an issue for a low to mid wage earner who socked away a lot of money in tax differed accounts.
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Old 04-20-2011, 01:08 PM   #6
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Haven't even read it yet but if you buy an annuity with qualified funds you pay taxes on the annuity payments - a lifetime annuity is considered to be RMDs on the pricipal invested.

Edit: I see they are talking about taxes on wealth. Nobody is going to impose such a tax on the net assets of IRAs and 401Ks - those are already setup for taxing. The only candidate I have heard propose a tax on wealth was Trump. In 2000 he suggested that a one time 14% surtax on net worth for the rich would solve all of our fiscal problems. Go Tea Party.
I must admit I am not an expert on RMDs, but isn't the RMD based on your IRAs year end balance each year, and so if your year end balance grows over time and taxes are increasing you may be dinged more (possibly even moving you into a higher tax bracket)? If you annunitize a portion of your IRA, you would certainly pay tax on annuities payout each year, but that might mitigate the impact of the a growing RMD, no?
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Old 04-20-2011, 01:11 PM   #7
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Haven't even read it yet but if you buy an annuity with qualified funds you pay taxes on the annuity payments - a lifetime annuity is considered to be RMDs on the pricipal invested.
Hey, that's my line! ...

Seriously, there is a difference between RMD's and "excessive RMD's" - those being considered withdrawls you are forced to take beyond your normal living expenses.

We've already used the "trick" of an SPIA (more to follow) to avoid that preimum to be considered for RMD's. While we will have "excess RMD's" (with the net to be reinvested in taxable funds), it's not something we're going to be losing sleep over.

Heck, it's forcasted that the majority of our residual estate value will go to our named non-profit charities, with no tax having to be paid (unless the laws change). I for one would rather give any "left over" money to charities to continue their "good works" than pay the government (who's track record suc*ks, IMHO).
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Old 04-20-2011, 01:19 PM   #8
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Originally Posted by DFW_M5 View Post
Rick Ferri's comments on RMDs is starting to scare me since most of the retirement $s are in IRAs:
Rick points out that ER gives you plenty of time (and very low income-tax brackets) to convert that IRA to a Roth. If you want to give yourself a good scare, try to predict how much longer the 15% income-tax bracket will be around.

Maybe in the long run it's cheaper to ER now and start the conversions. We've been converting a little every year for the last eight years (OK, we converted a LOT in 2009) and we're still not done yet.

I also think that the Bogleheads are continuing their inevitable Darwinian process of driving Rick into lurkerdom, much as they've already accomplished with Bill Bernstein & Larry Swedroe. Until the day he ERs, Rick has far too many better things to do with his clients than to spend his "free" (in more ways than one) time educating a bunch of argumentative Bogleheads.
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Old 04-20-2011, 01:20 PM   #9
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What are you so worried about. I believe that the distribution schedules are reasonable. And to state it again, you need pay the taxes but you don't have to spend the balance.

Lets take a look at the table.

For an 85 year old person they need take 1/14.8 = 6.7% distribution

For an 95 year old person they need take 1/8.6 = 11.6 % distribution

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Old 04-20-2011, 01:38 PM   #10
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Here is the Ferri post that alarmed me:

"Without getting specific, retirees who are former business owners and have sold their business and have most of their wealth in taxable accounts tend to have low income. They can control their income and their taxes very well in retirement.

In contrast, people who have drawn a paycheck and retired typically have large IRA rollover accounts (lawyers, physicians and other professionals). As they take required minimum distributions (RMD), they are going to be for a rude awakening. Those distributions will get larger and larger each year as they get older and older, and that means higher and higher taxes, especially under the proposed tax increases. Many RMD may end up being taxed at a much higher tax rate than the income was deferred at. Later in life (80s and 90s) is when the RMDs are huge.

I think a lot of wealthy retired people who were on a paycheck and contributed heavy to tax-sheltered account are going to be cursing the day they decided to do it.

Rick Ferri"
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Old 04-20-2011, 01:44 PM   #11
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"I think a lot of wealthy retired people who were on a paycheck and contributed heavy to tax-sheltered account are going to be cursing the day they decided to do it.

Rick Ferri"
And then again, maybe not ...

I have options to manage eventual taxes paid. If I paid them up front, that is not the case...

It all depends on your personal situation, and your desire on how those tax-deffered funds are to be managed.

As in all situations, there is no one "perfect" answer...
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Old 04-20-2011, 01:48 PM   #12
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And then again, maybe not ...

I have options to manage eventual taxes paid. If I paid them up front, that is not the case...
While I don't consider myself as wealthy, I hope you are right
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Old 04-20-2011, 01:52 PM   #13
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Of course, if your distributions are huge it is probably because you are living through one of the rosy Firecalc scenarios so all is good.
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Old 04-20-2011, 01:54 PM   #14
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Of course, if your distributions are huge it is probably because you are living through one of the rosy Firecalc scenarios so all is good.
It is good (and we don't use FIRECalc )...

It's just that our annual retirement expenses (another thread) are much higher than most who responded to that thread, and don't result in "excess RMD's" as calculated for most years after age 70.5...

We plan to withdraw a projected amount, RMD or not...

And no, we are not "wealthy" in any sense that I would consider as such.
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Old 04-20-2011, 01:59 PM   #15
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Rick points out that ER gives you plenty of time (and very low income-tax brackets) to convert that IRA to a Roth. If you want to give yourself a good scare, try to predict how much longer the 15% income-tax bracket will be around.

Maybe in the long run it's cheaper to ER now and start the conversions. We've been converting a little every year for the last eight years (OK, we converted a LOT in 2009) and we're still not done yet.

.
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Old 04-20-2011, 02:27 PM   #16
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For those of you who never want to dip into principal, RMDs are an issue. If you only want to live off interest and dividends then RMDs will be an issue. If you like to look at your balance RMDs are an issue.

The pact you made for an IRA, cognizant of the rules or not, is that it would (mostly) get spent down in your lifetime. The required distributions are more than reasonable.

For those of you with the "never get smaller" mindset, RMDs are probably doing you a favor.

You can't take it with you.
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Old 04-20-2011, 02:45 PM   #17
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Not wanting to sound too cynical, but still I think they're going to get you coming and going, when it comes to taxes.

I agree with MB that the present RMD requirements are reasonable. They only require you to use your retirement money in retirement, rather than passing much of it on to your heirs. I figured out exactly what the present RMD requirements will be on the projected balance of my TSP account (which is reasonably predictable, being 100% in the very stable G Fund that cannot drop in share price). The RMD size will always be less than the amount that I will plan to withdraw anyway, to last until age 93-95. The RMD is a larger PERCENTAGE as I age, because the account balance will be decreasing.

In other words, if I plan to withdraw a steady amount from the TSP that will result in running out of money at age 93-95, that will more than satisfy the current RMD requirements. Then if I live to be older, I will just live off of my taxable investments.

Right now (at the beginning of my retirement) I am focusing my withdrawal strategy more on TSP withdrawals than on taxable, until SS kicks in. This should lower my RMDs and "even out" my taxable income a little. Since I am favoring my taxable accounts with this withdrawal strategy, their growth will be enhanced.
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Old 04-20-2011, 03:22 PM   #18
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I'm one of those folks with both taxable and tax-deferred retirement funds.

My plan is to cruise from 59 1/2 to 70 on IRA withdrawals, dividends, and interest. Then at 70 I'll start Social Security (assuming the usual...), so as to minimize the tax bite on SS income that larger required minimum withdrawals would otherwise cause.

This, of course, assumes the world doesn't end next year, or I get smooshed by an asteroid before age 70.
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Old 04-20-2011, 03:27 PM   #19
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Hmmm, by the time I'm forced into RMDs I'll probably need the money to make-up for the gap in the difference between my Medicare voucher and my private insurance costs.

Time to go back to something productive, or more likely, unproductive but fun.
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Old 04-20-2011, 03:39 PM   #20
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I agree with MB that the present RMD requirements are reasonable. They only require you to use your retirement money in retirement, ...
As was remarked above, you're not required to "use" your retirement money; you are only required to pay taxes on it.

I expect my RMDs will all be "excess", since my DB pension and SS will cover my living expenses. It would take a lot of nerve, though, more than I have, to complain about being forced to pay more taxes because of high income. High income is a good thing, the way I see it.
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