IRA RMD Stuff

[TromboneAl]

Although it will be almost 20 years before I'd have to take RMD's on my IRA accounts, some decisions I make now, such as how much I convert to Roth accounts, are influenced by RMD issues.

My basic understanding is that RMD's are bad things, because they might force you to take out (and pay tax on) more money from your IRA than you'd prefer to.

If you're not planning on leaving an inheritance, does it matter that much?  Any other issues related to RMD's?

 

[MasterBlaster]

If I recall correctly, RMD's are based on average life expectancies. Some people have commented that the IRS longevity tables (which RMDs are based) are a bit skewed to the young side.

So if you are lucky enough to live longer than your average bear, then the distributions out of your IRA may be greater than you would choose for your personal distribution. In other words you may be required to pay taxes on IRA distributions before you are ready to take it out and spend it.

Therfore the snowball effect will be lessened due to premature taxes. 

 

[SteveR]

My RMD on the two IRAs I have from oong term 401k rollovers, given the recent trends of 8-15% annual increases I could face a pretty nasty tax bill at age 70.5 which is why my RE plan calls for early withdrawls for a period of time followed by shifting to after tax accounts. This will lower my total RMD tax liability but will still preserve the tax free growth to avoid a Little Friskies diet in my sunset years.

The plan would allow me to live pretty high on the hog for the first decade of RE and then throttle back as I slow down. The end game would leave a very respectable stash for the kids and grandmonkies. My issues are tax containment while still allowing for daily expenses and long term growth. It is an ambitious plan.

 

[TromboneAl]

So if I understand correctly, Steve, your plan is based on the fact that by taking the money out over longer periods of time, you won't be pushed into a higher bracket, as would happen if you wait and have higher RMDs.

OTOH, you'll pay tax on it earlier, and the money will no longer compound tax-free.

 

[SteveR]

So if I understand correctly, Steve, your plan is based on the fact that by taking the money out over longer periods of time, you won't be pushed into a higher bracket, as would happen if you wait and have higher RMDs.

OTOH, you'll pay tax on it earlier, and the money will no longer compound tax-free.

It is a case of pay me now or pay me more later. I can control the amount of my distribution now but can't do much at 70.5 to control it. If the value doubles in 20 years I could be in deep do do and be at the highest tax bracket. Taking it earlier allows me to control the throttle and I can keep it within a much smaller tax bracket.

 

[uncledrz]

So if I understand correctly, Steve, your plan is based on the fact that by taking the money out over longer periods of time, you won't be pushed into a higher bracket, as would happen if you wait and have higher RMDs.

OTOH, you'll pay tax on it earlier, and the money will no longer compound tax-free.

By doing a Roth conversion, you pay tax now, but the balance will continue to compound tax free.

 

[SteveR]

By doing a Roth conversion, you pay tax now, but the balance will continue to compound tax free.

That is true but in my case I don't have Roths and cannot do them for a while due to income levels so I was talking about traditional IRAs. Later I may do a conversion but that is not an option for a while.

 

[Nords]

Any other issues related to RMD's?

We've mentioned all of these before but not in relation to this type of question-- first, depending on the size of your RMD and your SS distribution, the RMD could drive your AGI high enough that a portion of your SS will be subject to tax, yet might not otherwise have been taxable.

Second, the act of calculating & verifying the amount of an RMD has added significant stress to my FIL's life. Even though custodians are required to provide an estimate, and even though he has a CPA son doing the paperwork for free, the whole penalty concept drives him crazy. So if you're not the kind of person who enjoys plugging through the forms & tables, this is an issue that might be significant.

Finally, waiting until the absolute last required day that you can take your first RMD will probably result in having to take two RMDs that year-- one for last year (the year you turned 70.5) and a second one for the year you're currently in.

 

[Jarhead*]

We've mentioned all of these before but not in relation to this type of question-- first, depending on the size of your RMD and your SS distribution, the RMD could drive your AGI high enough that a portion of your SS will be subject to tax, yet might not otherwise have been taxable.

Second, the act of calculating & verifying the amount of an RMD has added significant stress to my FIL's life.  Even though custodians are required to provide an estimate, and even though he has a CPA son doing the paperwork for free, the whole penalty concept drives him crazy.  So if you're not the kind of person who enjoys plugging through the forms & tables, this is an issue that might be significant.

Finally, waiting until the absolute last required day that you can take your first RMD will probably result in having to take two RMDs that year-- one for last year (the year you turned 70.5) and a second one for the year you're currently in.

Nords: I have to begin my RMD next year.

For the average bear, you better expect your Soc. Sec. to be taxed at the max. (85%)/.

We have no retirement income (Other than RMD requirements.). Even though the formula has been extended to make the amount required less punitive, it's what it is.

If you have pensions, etc. it would not be a bad idea to check into conversions. In our case, too close to call. (If you don't have enough income to put your soc. sec. at the 85% level, paying taxes will be the least of your worries.

 

[Nords]

Nords:  I have to begin my RMD next year.

For the average bear, you better expect your Soc. Sec. to be taxed at the max. (85%)/.

I thought that kicked in at a pretty low level. RMDs occupy a lot of space over at the Vanguard Diehards board...

 

[Jarhead*]

I thought that kicked in at a pretty low level.  RMDs occupy a lot of space over at the Vanguard Diehards board...

Yep. Of course if you live in a high state tax area like Calif., the fact that Soc. Sec. is tax free helps a little. (A small bone).

 

[REWahoo]

(A small bone).

Uh Oh. Too much information...

 

[Jeb-NY]

Here is the RMD chart

http://www.bankrate.com/brm/itax/news/20010321b.asp

Not as bad as I thought it was but still worth factoring into your plans. Add me to the list that will be moving some IRA money to Roth when it make sense.

Jeb