What's the big deal about IRA MRD?

[MrBig1]

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.

Well first, that doesn't make any sense. You will notice that I said "Pay my fair share". If I had been afforded a ROTH IRA option at my past employment I probably would have chosen that option. To take advantage of the employee matching funds and the profit sharing deposit I was in a company sponsored 401k. There was no other option. It just made sense to roll over into an IRA.

 

[Curmudgeon]

I'm happy to pay my taxes - I never cheat - but I'm not happy overpaying. Overpaying is paying more than the amount the law requires. So I'm willing to spend a few minutes educating myself on the tax law and strategies, so that I can keep my taxes at a minimum, and money in pocket at a maximum. If you're happy to pay taxes, I guess you could make yourself ecstatic by just sending an extra check for a few thousand dollars to the IRS every year?

It's not true that 'paying a lot of taxes is a good problem to have'. If taxes were always a fixed percentage of income, then yes, paying a lot means you took in a lot, and so that would be good. But tax law in the US is Byzantine, and the more common scenario is that income is constant, but the percentage you pay in taxes is a variable rate which depends on many things. In that case paying a lot of taxes is (in my opinion) a very bad thing.

 

[MrBig1]

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

There you go. That's all I was looking for. As I see it this is no different than my excessive monitoring and fiddling with my investments. The only difference is I have to watch out for Fidelitys "Round Trip" rules. Thanks, I think everyone likes a challenge.

 

[USA]

I believe my big deal about RMD is I don’t have control at that point anymore. Suppose I could adjust my mindset, but for now I’m FIRE’d. That fun over rides the “big deal” for a while. I’m still practicing how to blow that dough!

 

[Texas Proud]

Just a bit of info.... it is not only people in the middle that want to reduce taxes paid... the rich and ultra rich also do as much as they can to reduce their taxes...

Back when I did taxes just out of college there was one of the companies customers who actually had to pay $10 million quarterly for estimated taxes... like you, I would love that problem... but he also wanted a professional to help him so it was not $15 million per quarter....

I remember a different taxpayer where I did a lot of research on trying to get a tax credit after the fact... IOW, you were supposed to get approval for something and then you got the credit... but he did the work prior to the approval as he did not know about the credit... at the end, he paid about $100,000 in fees but got over $2 mill in tax credits...

 

[MrBig1]

I'm happy to pay my taxes - I never cheat - but I'm not happy overpaying. Overpaying is paying more than the amount the law requires. So I'm willing to spend a few minutes educating myself on the tax law and strategies, so that I can keep my taxes at a minimum, and money in pocket at a maximum. If you're happy to pay taxes, I guess you could make yourself ecstatic by just sending an extra check for a few thousand dollars to the IRS every year?

It's not true that 'paying a lot of taxes is a good problem to have'. If taxes were always a fixed percentage of income, then yes, paying a lot means you took in a lot, and so that would be good. But tax law in the US is Byzantine, and the more common scenario is that income is constant, but the percentage you pay in taxes is a variable rate which depends on many things. In that case paying a lot of taxes is (in my opinion) a very bad thing.

Once again I must not have made my point. I believe in paying my share. I don't gripe about paying because of the opportunities I've been afforded. I do understand folks who do use every option and spend time searching for ways to reduce their tax burden. I am simply trying to understand why the RMD is singled out and discussed so much.
My take on this now is simply that folks use this tax requirement as an opportunity for exercising their tenacity in respect of lowering their taxes. So now I understand what the big deal is.

 

[braumeister]

Looking at the positive side, I sometimes think about what it would be like if there were no RMDs.

A logical alternative would be that the entire balance in your IRA would immediately become taxable to your heirs upon your death. Forcing you into RMDs of a small percentage each year saves you and them from that grief.

 

[RunningBum]

I am simply trying to understand why the RMD is singled out and discussed so much.

Roth conversions to smooth out taxes over time is one of the most proactive things we can do to reduce taxes over time. Offhand I can't think of any move you can make that essentially is a lateral move, transferring assets from one account to another without (necessarily) changing what you're invested in, to reduce taxes paid. Some of us <looks in mirror> maybe do obsess too much to try to optimize it, but I don't see what's wrong with making an effort.

If I have some room to convert an IRA at the 0%, 10%, or 12/15% rate, it makes all the sense in the world to do that rather than wait and take it at 25% because my income is higher with a pension and social security.

I'm not disgruntled but I've paid my fair share, with some income taxed at 39.6% +7.75% state. No apologizes for trying to keep from paying extra.

If you don't want to mess with conversions and hear us talking about it, just skip those threads. There's even an "Ignore Thread" option under thread tools if it gets under your skin to see those threads keep popping up. I use it for threads I don't care to keep seeing.

 

[Danmar]

Looking at the positive side, I sometimes think about what it would be like if there were no RMDs.

A logical alternative would be that the entire balance in your IRA would immediately become taxable to your heirs upon your death. Forcing you into RMDs of a small percentage each year saves you and them from that grief.

Good point. That’s really what I did. I cashed all my tax advantaged accounts in a few years ago. Paid tax at my marginal rate (which is the maximum). Was not material and I wanted to simplify things. No RMD’s for me. Yay.

 

[Clone]

I am simply trying to understand why the RMD is singled out and discussed so much.

I think that one reason that it is discussed is because Age 70 represents a significant change in the tax situation for many of the readers of this forum. Much like deciding when to take SS, it represents a significant change. So we talk about that. A lot!

For the majority of the folks reading this board, we have passed or are close to being done with the years of accumulation and that tax situation. The phase of retirement before Age 70 is a time when investments, withdrawals, and deductions can be manipulated in preparation for Age 70 and beyond. Recent changes in tax law may change things like Roth conversions.

Personally, I am planning on drawing SS at age 70. Thus my tax situation will change dramatically with an increase of income from SS and RMDs.

RMDs represent a change in income, in investments, and in taxes. Some folks are just now realizing that having large pre-tax investments is going to create some big tax consequences at Age 70. So, we talk about how to plan for that. A lot!

 

[foxfirev5]

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..."

Nice. Very eloquently stated without offending the PC police.

 

[Souschef]

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.

This is exactly what I am doing. Thanks to the 2017 market, my 2018 RMD will be 10 K higher than 2017.
I have upped my QCD's, especially since I will not be itemizing in 2018.
I am also gifting part of it to our 4 sons Also putting some in 529's for grandchildren.

 

[MrBig1]

If you don't want to mess with conversions and hear us talking about it, just skip those threads. There's even an "Ignore Thread" option under thread tools if it gets under your skin to see those threads keep popping up. I use it for threads I don't care to keep seeing.

It's not that at all. Never a time when you don't stand a chance to learn something on this forum. My question has been answered for me. I fully understand the quest for perfection and control. I have just never applied this thought pattern to taxes. Just wanting to understand.

 

[NW-Bound]

...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...

Sure. But why pay more than your fair share if you do not have to? If you want to contribute more to society, there are other ways to do that than to pay more taxes.

Because of our progressive tax system, what people are looking to do is to average out their income so that the overall tax is lower. Here's a simple example.

Mr. A earns $200K one year, and nothing the next. Mr. B earns $100K each year. Who do you think pay more total taxes over the $200K that they each earn? The tax on $200K is more than double the tax on $100K. And the year where Mr. A has no income, he does not get his money back.

People are doing the same with their RMD. There's no way to avoid taxes on that pile of money sitting in 401k or IRA. The only way I can see to reduce (not to evade) taxes is to withdraw early and gradually to smooth out the income from year to year. You want to be Mr. B, not Mr. A.

 

[MrBig1]

My plan for the RMD was to reinvest it into taxable accounts. Use the extra cash to pay the taxes then make investments. Pretty simplistic.

 

[NW-Bound]

A long time ago, a taxpayer who had greatly varying income from year to year was allowed to do "income averaging" so that if he made $500K one year then nothing for the next 4 years was taxed more like a guy making $100K each of the 5 years.

The above sounded fair to me. That was taken away some time in the early 1980s.

 

[RunningBum]

It's not that at all. Never a time when you don't stand a chance to learn something on this forum. My question has been answered for me. I fully understand the quest for perfection and control. I have just never applied this thought pattern to taxes. Just wanting to understand.

OK, wasn't sure since you were calling people grumpy for paying taxes they don't need to. I wasn't sure if you were insinuating anything about us, but I'll assume not.

Personally I don't understand why you wouldn't want to make at least a small effort to optimize taxes, but I'm not sure I really care.

 

[MrBig1]

OK, wasn't sure since you were calling people grumpy for paying taxes they don't need to. I wasn't sure if you were insinuating anything about us, but I'll assume not.

Personally I don't understand why you wouldn't want to make at least a small effort to optimize taxes, but I'm not sure I really care.

LOL, No insinuation at all. No desire to insult or call names. I never said or tried to imply there was a problem with optimizing taxes. I did say that I don't mind paying taxes that I owe. RMD's seem pretty straightforward to me. At 70 1/2 yrs old they make you take a percentage of your investment out and pay taxes on it. I now understand that some folks didn't for see the impact on taxes RMD's could have. Others enjoy the challenge of minimizing taxes paid. I got it! No insults were intended, I was only trying to understand why they were such a hot topic. That's why I asked what's the big deal?
Look guys, I'm new at this retirement thing. I'm probably gonna ask a silly question from time to time. I appreciate you all taking time to answer. I will never take a critical or condescending position in this forum. I think a why question is not out of line now and then.

 

[RunningBum]

LOL, No insinuation at all. No desire to insult or call names. I never said or tried to imply there was a problem with optimizing taxes. I did say that I don't mind paying taxes that I owe. RMD's seem pretty straightforward to me. At 70 1/2 yrs old they make you take a percentage of your investment out and pay taxes on it. I now understand that some folks didn't for see the impact on taxes RMD's could have. Others enjoy the challenge of minimizing taxes paid. I got it! No insults were intended, I was only trying to understand why they were such a hot topic. That's why I asked what's the big deal?
Look guys, I'm new at this retirement thing. I'm probably gonna ask a silly question from time to time. I appreciate you all taking time to answer. I will never take a critical or condescending position in this forum. I think a why question is not out of line now and then.

It's all good. For the record, "the challenge" is only a part of it. Actually paying less taxes and being able to direct it where I'd like to is by far my main motivation. Trying to get it as precisely as possible instead of "close enough" would be the challenge part that I probably spend too much time on, but sometimes I think I'm trying to squeeze an extra dollar out of it and I find something that makes a significant difference.

 

[Which Roger]

Taxes in retirement are very different than taxes in working years. When working, almost all of your income is earned income and there aren't a lot of strategies available to reduce taxes. In retirement, none of the income is earned (by definition), and it often comes from multiple sources. That means a lot more strategies are at your fingertips for managing income and taxes. RMDs, when to take social security, when to realize capital gains, whether to take pension as an annuity or lump sum, and other similar topics are all big on this forum for that very reason.

 

[MrBig1]

A long time ago I asked myself the question, "Just how much does a man need in life". My final answer is, "Not nearly as much as I thought". My position is probably much more simplistic then most. I'm drawing fixed incomes that more than cover my living expenses, I have no debt and I have a Rollover IRA invested 90/10 domestic/foreign equities that I never need to touch. I'm not rich but I'm not hurting. I thank the good Lord every day for what he has provided.
I appreciate the opportunities presented in this forum to learn and engage in conversations with you guys. I have much to learn.

 

[braumeister]

I'm probably gonna ask a silly question from time to time.

Maybe you should find a different forum. None of us here have ever done that. Never. Not even once.

Actually, just ask away. Anything, any time (that doesn't violate the forum rules). People with thin skins tend not to last long, but that probably doesn't mean you.

 

[ejman]

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?

I don't know if it is the wrong attitude ( I doubt it) but I have a slightly different take on this RMD business. I ER'd 15 years ago at 52 and have been living off my taxable investments. Started SS at 62 and have a tiny corporate pension ( $4k a year) but it turns out that my LBYM was so strongly ingrained that I'm perfectly happy with the dividend and CG income from my taxable nut.

The Tax deferred nut has of course continued to grow and now it represents about 60% of my NW. I am fully cognizant of the tax arguments for Roth conversions all along but realized that if I converted that money to a Roth I will never touch it in my lifetime. (MY LBYM curse)

Four "potential" benefits from RMD's:
1) It's "income" coming into my taxable accounts so I'm more likely to spend it rather than just let it sit in a Roth (Anti LBYM assistance!)
2) I intend to purchase additional stock fund shares with my unused RMDs. Two fold benefit - I get extra dividends in my lifetime which I'm OK spending and my heirs get a stepped up value of the fund shares when I croak.
3) If I'm ever actually bothered by the taxes paid I can always gift from the tax deferred amount to lower taxes paid
4) If I'm ever in a situation where the medical bills are very large and medical expenses are still tax deductible I can use medical expenses as a deduction against RMD income.

 

[RobbieB]

Yes, the RMD thing is hopefully something that you can minimize.

It's always best to do the least of whatever it is someone else is requiring you to do.

 

[Car-Guy]

Funny, no one seemed to complain (or think about RMD's) too much when they were tax sheltering this money while they were working. The way I look at it, this is one of the better tax breaks for the little guys. Earn it at a 39.6% tax rate but end up paying a lot lower rate with RMD's, for most folks anyway.