What's the big deal about IRA MRD?

[MrBig1]

I read about people wanting to minimize their MRD for tax purposes. I don't really understand why. I know that you can be forced up into a higher tax bracket and have to pay higher taxes but for me the bottom line is cash in my hand. I've often joked that I wish I paid $2M a year in taxes. Just think of the income you would have. Taxes are just a part of life and IMO I don't mind paying them. Does that mean I've got the wrong attitude?

 

[sengsational]

I think you mean "RMD", as in 'Required Minimum Distribution"?

The concept is that, because we have a progressive tax system, minimizing taxes across multiple years means always filling up those low tax brackets. If you don't use them, they're gone, and that money must still pass through the tax gauntlet. In the case of the "forced march" of RMD's, your marginal bracket might be higher.

Someone else can probably explain it better, lol!

 

[street]

That was explained well.

One other reason maybe to keep income low to receive the subsidy for ACA. I might not be understanding the question right but they maybe wanting to keep income low so they can benefit from the ACA subsidies.

 

[aaronc879]

Many people on this forum are/were above average earners and therefore above average savers. They have so much money saved that when they reach 70.5 and are forced to take a minimum % out of their saving, that money will put them in a higher tax bracket. So if they can move some of that money now then it saves them money later. I agree, I would love to have their problem but why pay more than you need to.

 

[OldShooter]

We are hitting RMD territory in 2018. Our issue is this: We will be required to take more money than we need. Possibly by quite a lot. We will then have to pay federal and state income taxes on that money, leaving a much smaller balance to be reinvested and that reinvestment account will of course be taxable. Tax brackets per se are really not the issue.

So from an investment viewpoint we would be far better off leaving the full amount of the excess withdrawal continuing to earn in a nontaxable account. Sure, we'll pay taxes eventually but later is better than sooner.

 

[SecondCor521]

I read about people wanting to minimize their MRD for tax purposes. I don't really understand why. I know that you can be forced up into a higher tax bracket and have to pay higher taxes but for me the bottom line is cash in my hand. I've often joked that I wish I paid $2M a year in taxes. Just think of the income you would have. Taxes are just a part of life and IMO I don't mind paying them. Does that mean I've got the wrong attitude?

Emphasis added.

The bottom line is that you can have more cash in your hand over your lifetime if you minimize your RMDs by, for example, doing Roth conversions in early retirement before getting to Social Security age. This reduces taxes paid, which ends up leaving you with more cash in your hand.

The fault in your thought process, if I may be bold enough to describe it that way, is that you are wanting to have your net worth and taxes both be free variables. If people could magically change their net worth, then sure, double your net worth and don't worry about optimizing taxes. For most of us, our net worth is what it is, and we're trying to minimize the taxes on that number to maximize our spendable funds.

Minimizing taxes becomes relatively important because for many of us, taxes was or is our single biggest expense. Also, most of us don't derive as much enjoyment out of paying taxes as we would spending a similar amount of money on a cruise or vacation or giving it to our kids. So the cost/benefit ratio is not very good on the taxes category.

 

[joeea]

I read about people wanting to minimize their MRD for tax purposes. I don't really understand why. I know that you can be forced up into a higher tax bracket and have to pay higher taxes but for me the bottom line is cash in my hand. I've often joked that I wish I paid $2M a year in taxes. Just think of the income you would have. Taxes are just a part of life and IMO I don't mind paying them. Does that mean I've got the wrong attitude?

It doesn't mean you have the wrong attitude. It means that others have a different attitude.

It means that some folks like to avoid paying taxes if they can. And some spend a lot of time and effort trying to do just that.

 

[MrBig1]

I think you mean "RMD", as in 'Required Minimum Distribution"?

The concept is that, because we have a progressive tax system, minimizing taxes across multiple years means always filling up those low tax brackets. If you don't use them, they're gone, and that money must still pass through the tax gauntlet. In the case of the "forced march" of RMD's, your marginal bracket might be higher.

Someone else can probably explain it better, lol!

Yes, left handed dyslexic here, RMD. lol. I figured I'd get schooled on this topic. Thank you all for the responses.
You see, I really don't mind taxes. I do mind how my tax dollars are spent. I understand that we would all rather spend our money on more enjoyable items. I get the fact that RMD's can make you pull out more money than you need. I guess I just see a need to pay my portion to support the nation I choose to live in. Call me a Patriot or Stupid, I don't care.
Listen, I'm not a troll and I'm not trying to pick a fight. I don't even want to pay more than my fair share but I feel like taxes are a necessity. They provide me with the benefits of living in my beloved country. The reason I am able to be retired comfortably is all about the opportunities I was afforded living in this country.

 

[RunningBum]

What if instead of paying $2M in taxes, you could pay $1.5M over the years and have an extra $500K to spend, pass down, or donate? That's my preference with my money. If you'd rather pay taxes, not saying your thinking is wrong, but I'd say that puts you in the minority.

 

[braumeister]

Yes, left handed dyslexic here, RMD. lol.

Don't worry about it; you're in good company. Until recently, Fidelity always called them MRDs too. In fact they still have that in several places on their website. For example:
https://web.fidelity.com/mrd/application/MRDCalculator

 

[FIRE'd@51]

I get the fact that RMD's can make you pull out more money than you need.

One thing you might want to do is to consider QCD's (Qualified Charitable Deductions). It's a nice way to make a charitable contribution above the line (i.e. it reduces AGI), especially if you can no longer itemize due to the new tax law.

 

[MrBig1]

It doesn't mean you have the wrong attitude. It means that others have a different attitude.

It means that some folks like to avoid paying taxes if they can. And some spend a lot of time and effort trying to do just that.

You see I can understand this post. I have a cousin who is a very accomplished accountant. His hobby is paying the least amount of taxes he can. He derives great joy doing so. I don't believe this is a bad hobby. I just don't spend the time he does looking for every deduction or opportunity. This is still all about paying what you owe eventually. One method I've read about is ROTH conversion. Seems like you pay all the tax now then have to let it sit for 5 years. At 61yrs old there doesn't appear to be a benefit for me.
I really am trying to learn here guys. Again, thanks for your replies.

 

[gayl]

I really don't mind taxes. I do mind how my tax dollars are spent. .... taxes are a necessity. They provide me with the benefits of living in my beloved country. The reason I am able to be retired comfortably is all about the opportunities I was afforded living in this country.

+1

 

[MrBig1]

Don't worry about it; you're in good company. Until recently, Fidelity always called them MRDs too. In fact they still have that in several places on their website. For example:
https://web.fidelity.com/mrd/application/MRDCalculator

Thank you, I just looked at my Fidelity accounts and that's where I got that from. MRD, RMD, I am a lefty and have a real bad case of "can't help it" when it comes to transposing numbers and letters. Kind of embarrassing from time to time. I know what I'm saying, I just don't come out right sometimes.

 

[2B]

If RMD is an issue, it means you've saved more than you probably need for a successful retirement. The IRS has the RMD calculations done so it's nearly impossible to successfully outlive your money. You might have to worry about it at 95 or so. If you kick the bucket sooner, you've just had to pay the taxes you avoided when you socked it away "tax deferred."


In retrospect, I wish I had put more into a Roth IRA.

 

[marko]

Yes, but.
I wonder how many here are in the same boat as I am where your RMD will be just about what your current IRA withdrawal is.

 

[MrBig1]

Emphasis added.

The fault in your thought process, if I may be bold enough to describe it that way, is that you are wanting to have your net worth and taxes both be free variables. If people could magically change their net worth, then sure, double your net worth and don't worry about optimizing taxes. For most of us, our net worth is what it is, and we're trying to minimize the taxes on that number to maximize our spendable funds.

As I see it, each year our net worth changes and so does our tax burden. And they are proportional to each other. The more you make the more you pay. I understand the desire to pay less. I don't understand how a group of folks like us who have been so blessed with income can be so disgruntled about supporting the system that helped us get where we are. That's why I asked, "What's the big deal". Just trying to understand the mind set. As I explained about my cousin, it's just a hobby or a challenge. He certainly doesn't need the money.

 

[Sunset]

As I see it, each year our net worth changes and so does our tax burden. And they are proportional to each other. The more you make the more you pay. I understand the desire to pay less. I don't understand how a group of folks like us who have been so blessed with income can be so disgruntled about supporting the system that helped us get where we are. That's why I asked, "What's the big deal". Just trying to understand the mind set. As I explained about my cousin, it's just a hobby or a challenge. He certainly doesn't need the money.

I'm not disgruntled, I just don't want my hard earn hours of work being wasted.

For me it's simply that a large percentage of the tax money I pay is wasted, or pays for things that I don't support and don't agree with.

Things that I would never spend my money on.

So if I can avoid paying EXTRA taxes then I'll do it, that way the money is available to spend on things I believe in.

 

[marko]

I don't understand how a group of folks like us who have been so blessed with income can be so disgruntled about supporting the system that helped us get where we are. .

FWIW, I had two different friends from two different European countries tell me this: (paraphrasing)
"...You Americans always complain about paying your taxes when we pay more here. The difference is that we see where our taxes go in (almost) free higher education, health care, good infrastructure and so on. In the US, it seems that you don't always see where the money goes..."

 

[pacergal]

....
You see, I really don't mind taxes. I do mind how my tax dollars are spent. I understand that we would all rather spend our money on more enjoyable items. I get the fact that RMD's can make you pull out more money than you need. I guess I just see a need to pay my portion to support the nation I choose to live in...... I don't even want to pay more than my fair share but I feel like taxes are a necessity. They provide me with the benefits of living in my beloved country. The reason I am able to be retired comfortably is all about the opportunities I was afforded living in this country.[/QUOTE]

+1

 

[43210]

OP, if you're not bothered by tax issues, I don't understand why you use 401k and IRA at all. Just withdraw all your money from them right now, and be done with it.

 

[Which Roger]

I've often joked that I wish I paid $2M a year in taxes. Just think of the income you would have.

This is the part that stuck with me when I first read the post. I agree completely. Having my investments perform through the roof resulting in a huge tax liability is preferable to having them tank and eating cat food while not paying any income tax.

That being said, I get the other points that people making. Having a lot of money is a nice problem to have, but no reason to pay more taxes than I have to.

 

[Lawrencewendall]

Yes, but.
I wonder how many here are in the same boat as I am where your RMD will be just about what your current IRA withdrawal is.

Not retired yet but I ran the RMD numbers this weekend and they will be slightly lower that my planned Roth conversions. Planning on doing the conversions to keep me in the 12% bracket for 13 years before RMD kicks in.

 

[BrianB]

The RMD for a person age 70.5 is just 3.65%. At age 80 it is 5.35%.

For the many people targetting a 4% withdrawal rate it doesn't seem like a major issue, at least until they reach their mid-80's and later.

 

[FIRE'd@51]

Just trying to understand the mind set. As I explained about my cousin, it's just a hobby or a challenge. He certainly doesn't need the money.

I think this is the reason. Most of us are successful people who enjoy the game of trying to optimize everything.